Citi Trends, Inc. (NASDAQ:CTRN) Q2 2023 Earnings Call Transcript
Citi Trends, Inc. (NASDAQ:CTRN) Q2 2023 Earnings Call Transcript August 23, 2023
Operator: Greetings, and welcome to the Citi Trends 2Q '23 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded Tuesday, August 22, 2023. I would now like to turn the conference over to Nitza McKee, Senior Associate. Please go ahead.
Nitza McKee: Thank you, Chris, and good morning, everyone. Thank you for joining us on Citi Trend's second quarter 2023 earnings call. On our call today is our Chief Executive Officer, David Makuen; and Chief Financial Officer, Heather Plutino. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it's available on the company's website under the Investor Relations section at www.cititrends.com. You should be aware that prepared remarks today made during this call may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Management may make additional forward-looking statements in response to your questions.
These statements do not guarantee future performance. Therefore, you should not place undue reliance on these statements. We refer to you to the company's most recent report on Form 10-K and other subsequent filings with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I will now turn the call over to our Chief Executive Officer, David Makuen. David?
David Makuen: Thank you, Nitza. Good morning, everyone, and thanks for joining us today on the second quarter fiscal 2023 earnings call. I will begin our call with highlights of our second quarter financial and operational performance. Heather Plutino, our Chief Financial Officer, will then elaborate on our detailed financial results and a few other items related to our outlook. Then we'll open the call up for your questions. We are pleased with our second quarter results that reflect positive momentum for both, the top line and gross margin, against a continued challenging macro backdrop. The quarter was highlighted by significant sequential comparable store sales acceleration from the first quarter. As you've heard, we are committed to improving our operating results with an extreme focus on driving improved comp store productivity.
Our 880 basis point sequential increase in our comp sales trend is a direct result of our team's agility to amaze our customers via compelling spring and summer assortments. Coupled with sales momentum, we delivered a strong gross margin of 38.2% which was above last year and 150 basis points better than the first quarter. Importantly, we experienced improved traffic levels and strong conversion throughout the quarter, signaling that our product assortment, strengthened by our strategic inventory rebuild in key areas of business is resonating with our customers. Our primary strategic initiative to rebuild inventory in key areas of the business is definitely paying dividends. Central to the rebuild is offering a balanced assortment of good, better and best price styles with an emphasis on incorporating a healthy mix of entry price points that appeals to our value-based customers.
Our total inventory at the end of the quarter was down 5% versus the prior year. Compared to down 12% at the end of the first quarter. We are right where we want to be. And rest assured, we are keeping tight reins on our inventory and ensuring we have the right amount of newness and freshness across our primary category Cities. During our last call, we mentioned sharpening our focus on trend and development as a key lever for the year. With the first half in the books, we are seeing some clear sustainable wins on the product front, which I'll speak to in a few minutes, and I'm confident that we are moving in the right direction. We definitely have more work to do, consistent with our theme of doubling down on controlling the controllables. In fact, across our three primary operational pillars, buy, move and sell, we have many initiatives in flight that further optimize business productivity.
What's important to note is that our initiatives are designed to benefit our customers who mean so much to us. After visiting many stores and interviewing customers and tenured associates who know our neighborhoods better than anyone, I can confirm that inflationary pressures are still very real for the population cohort that we cater to each and every day. As a reminder, the bulk of our customer base makes it work on $50,000 or less per year, with about half of our customers living on $25,000 per year I have met customers whose rent is up 25%, paying higher utilities on just $25,000 a year and customers who live with their extended family members making it work on $35,000 a year. Incomes are really being stretched. As we sit in the heart of the neighborhood, what I also observe is how resilience lower-income families are.
Our everyday mission is to provide access to fresh and fun trends to these families in a friendly, pleasant and high-energy environment that is all about respect. Getting this right means everything to us, and I can assure you our model is well suited to thrive as times get better. Now for a little more detail on our performance during the quarter. While all months were better than the first quarter on the comp sales trend line, our best month was July. Buoyed in part by pent-up demand that showed up after the cooler weather trends abated in the northern portion of our fleet. Our family-centric seasonal moments were strong, including Mother's Day, Memorial Day, July 4. From an assortment perspective, positive momentum in the quarter was broad-based.
Notable outperformers included footwear, ladies and men's apparel, beauty and Q Line merchandise. These categories benefited from our inventory rebuild efforts and had customers voting yes to trends at amazing values. As we head into the third quarter, our stores are stocked with the latest trends, fashion and basic needs across apparel, backpacks, home, tech, hydration and more. And our store teams are ready to deliver. They do a wonderful job merchandising our specialty value store experience that reflects their connection with our customers. I have seen so many great examples of our customer experience managers, our title for store managers, delivering tailored service to their regular customers, helping them look great, feel good and show up for whatever comes their way.
With our Buy team in the ongoing merchandising process, for the fall season and well along setting up for a successful holiday season, the marketplace remains ripe with high-quality, high-value goods. Our flexible and agile operating model, combined with our strong balance sheet, puts us in an excellent position to continue to buy the right goods at the right price. Importantly, we ended the second quarter with liquidity of approximately $141 million, inclusive of $65 million in cash, no borrowings on our $75 million asset-based lending facility and no debt. I am incredibly proud of how the team managed the business in this environment while maintaining a laser focus on our strategic priorities. We were clear during our first quarter earnings call that we would take decisive actions that reflect our deep connection with our customers.
Our performance during the quarter boiled down to positive momentum tied directly to the execution of the priorities that we said would fuel our sequential top line improvement over the course of the year. In this vein, let me take a moment to update you on our four strategic priorities, within the context of driving profitable sales during the rest of the year. First up, and number one, driving comp store productivity. The headline here is all about aligning our assortment with the needs and wants of our customers, which includes our decades-long commitment to African American families, combined with our recent efforts to build awareness and traction within rapidly changing multicultural neighborhoods, thanks to the outsized growth of the Latinx populations.
While the first half tilted towards essentials and surprise and delight pickups and accessories, we are seeing in Q2, apparel and footwear demand moving in the right direction. Our customers are responding to our healthy penetration of sharp price pointed goods for her, him and kiddos. This shows up in our strong conversion indicating our lower-income customers are really appreciative of our potent offering of trend, quality and value at $9.99 and less. Timing of fresh goods is also playing a role in that our customers value high-quality setup in the store and presentation of newness in our stores for a given season. We have worked really hard this year to refine the timing of our product flow in order to satisfy the early adoption of new trends and seasonal changes in product assortment.
Lastly, we are adding muscle to the areas of the business where we believe there are significant share of wallet opportunities by deploying incremental talent and promoting from within to drive the top line. I am more confident than ever in our people to drive comp store sales productivity. Our second strategic priority is managing inventory and maximizing margin. I think you can tell from the stats that we are controlling what we can control with respect to our inventory levels while delivering on our promise to rebuild where appropriate in targeted areas of the store. Our primary approach is adding breadth in the right stores and in the right categories, which is yielding results that show strong consumer satisfaction and adoption. We are learning a lot along the way and calibrating as we go.
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I'm most excited that our team is applying analytics earlier in the process in response to the consumer reaction to healthier inventory. Looking forward on the margin front, we are maintaining a maniacal focus on sell-throughs and turns in order to maximize merchandise margin. We also include domestic inbound and outbound freight in gross margin. And the good news here is that during the quarter, we completed a large freight optimization initiative that will help us deliver reduced freight costs already embedded in our guidance. In total, I feel we are well positioned to recruit market share and to capitalize on potential future demand. Our third priority is controlling SG&A expenses and leveraging our balance sheet. The good news is the headline on expense management remains consistent.
We've instilled a disciplined and prudent approach to expense management across the entire organization, and we delivered on our internal expectations for the second quarter. Although we will continue to look for opportunities to drive incremental cost efficiencies, we believe our cost structure will remain relatively consistent. And more important, highly leverageable as we look to fuel our top line, providing significant potential operating flow through. Additionally, liquidity allows us to take advantage of a product rich environment for high-quality goods. Lastly, our fourth priority is executing technology enhancements. The main highlight for this initiative is our upgraded ERP system, which will go live shortly. We are ready and excited for major enhancements and added functionality that are game changers and driving long-term productivity.
The upgraded ERP system will benefit our teams throughout the organization, with a particular boost to our Buy team, providing a new tool set, leveraging data and analytics to dynamically plan and allocate smarter based on climate, trend and replenishment needs. Essentially, this system over time, will enhance our ability to get the right goods to the right stores at the right time. Ultimately fueling improved full-price sell-through while reducing markdowns, a win-win for both, the top line and bottom line. In summary, we are pleased with our second quarter results that reflect positive momentum for both, the top line and gross margin, attributed to proactive efforts by the team to execute our stated plans that our customers are responding to living our purpose, known as Citi Life, which means we live both, live proud and respect all is more important than ever and is the centerpiece of our local neighborhood strategy, serving as the primary specialty value store for local families to enjoy fresh and fun trends that will never break the bank.
With that, I'll turn the call over to Heather Plutino, our CFO. She will discuss our second quarter results in detail as well as a few items related to our outlook. Heather?
Heather Plutino: Thanks, David, and good morning, everyone. Before I walk through our second quarter results, I want to take a moment to thank our many associates for their hard work and dedication. Each of our buy, move, sell and support teams contributed in a big way to our improved performance in the second quarter, and I couldn't be more proud or more grateful. While the selling environment remained uncertain, particularly for our core customer base, our teams continued to execute against our strategic priorities while remaining disciplined with cost control. Additionally, given the challenging environment, we continue to leverage our strong balance sheet with $65.8 million of cash, well-controlled inventory, an undrawn $75 million revolving line of credit and no debt.
Turning to the specifics of our second quarter financial results. Total sales for the quarter were $173.6 million, a decrease of 6.2% versus Q2 2022. As David mentioned earlier, shopper conversion remained strong throughout the quarter as our assortments resonated well with customers. We are pleased to have seen traffic and basket improved sequentially from the first quarter as a result of our inventory build rebuild initiative and our efforts to rebalance our good, better, best assortment. Second quarter comp sales decreased 5.3% compared to last year and 880 basis points acceleration from Q1. We opened five new stores at the end of July, including a store in Inglewood, California, marking our first store in L.A. County proper. We supported these grand openings with a mix of digital and radio marketing including Spanish radio spots for our multicultural store openings.
Early results have been encouraging across the five new locations. During the quarter, we also remodeled eight stores to drive improved comp sales productivity. Gross margin for the second quarter was 38.2%, slightly higher than last year and significantly stronger than our first quarter. This sequential improvement was primarily due to lower markdowns and moderation of freight expense in Q2. As David mentioned, we expect freight to further moderate in the second half of the year. SG&A expense dollars totaled approximately $69.5 million for the quarter or $69.4 million as adjusted, down about 1% to last year. Lower sales in the quarter drove adjusted SG&A deleverage of 300 basis points versus Q2 2022 to a rate of 40% of total sales. Operating loss was $7.9 million in the quarter or $7.8 million as adjusted compared to an operating loss of $3.3 million in Q2 2022.
Net loss per share was $0.61 or $0.60 as adjusted versus loss per share of $0.31 in Q2 2022. Now turning to the balance sheet. Total inventory dollars at quarter end decreased 5.4% to last year compared to a decrease of 12% at the end of the first quarter. We remain comfortable with the level and makeup of our inventory and are carefully investing in key areas to drive demand. Next, I'll turn to our outlook. While we expect discretionary spending to remain under pressure in the second half for the low-income families we serve, we are reiterating our guidance for the year which incorporates the expected impact of our key initiatives of controlling the controllables and building on the momentum experienced during the second quarter. Our reiterated outlook for fiscal 2023 is as follows.
Total sales for the year are expected to be in the range of negative mid-single digits to negative low single digits as compared to fiscal 2022. Full year gross margin is expected to be in the high 30s. Full year EBITDA is expected to be in the range of $5 million to $20 million. During the year, we plan to open five new stores, remodel 10 to 20 stores and close 10 to 15 underperforming stores. Full year capital expenditures are expected to be in the range of $15 million to $20 million. And finally, year-end cash balance is expected to be in the range of $85 million to $105 million. Overall, we are pleased with our second quarter results. The teams are not standing still and are taking aggressive actions to drive top line growth while maintaining a disciplined approach to our expense structure, and to capital deployment.
This approach, combined with our strategic growth initiatives, gives us confidence in our ability to continue to drive the improved results embedded in our guidance. With that, I'll turn the call back to David for closing comments. David?
David Makuen: Thanks, Heather. I can tell you that the foundation of our 77-year-old brand is strong. As a brand and a company, we're really proud of our connection to our neighborhoods, employing and serving true locals with a high-quality experience. Our 611 stores are located in the heart of these neighborhoods, operating within 5 miles or less from the homes of our core customers and with little or no competition in the immediate area. Our customer base is loyal and well aware that the whole family can rely on Citi Trends for apparel, accessories and home trends for way less spend. We curate our product offering from a strong base of vendor partners with some of these partnerships lasting multiple decades. As a result, we enjoy a large share of the markets we're in.
I remain excited about the potential of this important brand and believe that our strong foundation, coupled with the growth-minded investments we are making to fuel the top line will unlike -- will unlock our flow through earnings potential. Before I turn the call over to the operator, I want to take a moment to thank the entire Citi Trends team for their hard work and dedication, day in and day out. They have done an excellent job of helping manage the business in a difficult environment and we are so thankful for each and every one of them. Thank you, and we are now ready to take your questions. Chris, back to you.
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