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Edited Transcript of CTRN earnings conference call or presentation 22-Aug-19 1:00pm GMT

Q2 2019 Citi Trends Inc Earnings Call

SAVANNAH Sep 9, 2019 (Thomson StreetEvents) -- Edited Transcript of Citi Trends Inc earnings conference call or presentation Thursday, August 22, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bruce D. Smith

Citi Trends, Inc. - President, CEO, Secretary & Director

* Stuart C. Clifford

Citi Trends, Inc. - Senior VP & CFO

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Conference Call Participants

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* Eric Martin Beder

Small Cap Consumer Research, LLC - CEO & Consumer Analyst

* Nitza McKee

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Presentation

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Operator [1]

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Greetings and welcome to the CTRN 2Q '19 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded today, Thursday, August 22, 2019.

I would now like to turn the conference over to Mr. Nitza McKee, Senior Associate. Please go ahead.

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Nitza McKee, [2]

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Thank you. 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 is available on the company's website under the Investor Relations section at www.cititrends.com.

You should be aware that prepared remarks 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 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 President and Chief Executive Officer, Bruce Smith. Bruce?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [3]

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Thanks, Nitza. Good morning, everybody, and thank you for joining us today. Also on the call is our Chief Financial Officer, Stuart Clifford; and our Senior Vice President of Merchandising, Christina Short.

As the second quarter progressed, our sales trends began to improve, and I'm pleased to report that the momentum has continued early in the third quarter. Despite a slow start to the second quarter, our comparable store sales decrease of 1.2% was at the more favorable end of our guidance.

The non-apparel part of our business consisting of Accessories and Home merchandise continued to grow. And while apparel sales declined, the trend was better in the latter part of the second quarter and has also continued to show improved performance early in the third quarter.

We continued to strategically reallocate more inventory dollars towards the growing non-apparel lines, which will gain in importance as we approach the holiday season when non-apparel gift items resonate with our customers. Although, we are shifting inventory dollars from apparel to non-apparel, we still believe that we can improve recent apparel sales trends during the back half of the year, particularly considering that we will be comparing results to a period of time last year when we had some specific Ladies apparel fashion misses.

It's important to note that we were very pleased with our efforts in the second quarter to improve inventory turns and maintain inventory liquidity. We entered the third quarter in a very clean and a high-quality inventory position as reflected in a 5% reduction in inventory levels, including a 14% decline in comparable stores inventory.

Now I will turn the call over to Stuart to provide additional details on the results before I discuss future plans and expectations.

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Stuart C. Clifford, Citi Trends, Inc. - Senior VP & CFO [4]

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Thanks, Bruce. Total sales in the second quarter increased 0.5% to $183 million. Comparable store sales decreased 1.2% in the quarter. The decline in comp store sales during the second quarter was reflected in a 1.5% decrease in the average unit sale and a reduction in transaction counts of more than 1% partially offset by an increase in the number of items per transaction of nearly 2%.

Looking at comp store sales for the individual merchandise categories, the Home division again led the way with a 5% increase on top of an 11% increase in last year's second quarter. Accessories were up 4% in this year's second quarter while they were up 3% in the second quarter of 2018. Sales in the Ladies division were down 2% after being up slightly during the same quarter last year. Comp sales in the Men's division were down 5% after increasing 5% in the same quarter last year, and children's comps were down six percent after increasing 3% in last year's second quarter. In the first half of the year, total sales decreased 1.3%, while comparable store sales were down 2.9%.

Gross margin in the second quarter was down 200 basis points due primarily to the need to take more markdowns in the light of the decrease in comparable store sales. For the first half of 2019, gross margin is 160 basis points lower than in the first half of 2018.

SG&A expenses continued to be very well controlled, increasing only 1.1% in the second quarter compared to last year's expenses despite a higher store count and normal inflation. As a percent of sales, second quarter SG&A expenses increased 30 basis points to 34.5% from 34.2% in the second quarter of 2018 due primarily to the deleveraging effect that declining sales has on the expense ratio. For the first half of 2019, SG&A expenses, when adjusted for $1 million of proxy contest expenses incurred in the first quarter, were virtually flat with the first half of 2018.

Net income in the second quarter of 2019 was $0.4 million or $0.03 per diluted share compared to $3.2 million or $0.24 per diluted share in last year's second quarter. For the first half of 2019, net income was $8.2 million or $9.1 million when adjusted for proxy contest expenses compared to $14.5 million in last year's first half. Earnings per diluted share were $0.68 in the first half of 2019 or $0.76 when adjusted for proxy contest expenses compared to $1.08 in the first half of 2018.

Finally, a reminder about a change that is having a significant impact on our balance sheet. As we discussed on our first quarter earnings call, following year-end, we completed the adoption of the new lease accounting standard using the transition method which applied the standard as of the effective date. Consequently, our 2019 balance sheet has $153 million in new right-of-use assets and $160 million in new lease liabilities not shown on last year's balance sheet.

Now I'll turn the call back over to Bruce.

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [5]

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Thanks, Stuart. And looking forward, as we strive to improve over apparel fashion and execute shifts in the overall mix between apparel and non-apparel, we are working with our Board of Directors, including Peters Sachse, Special Advisor to the CEO, on a number of strategic initiatives. Part of this work involves a survey of 1,300 respondents who were either familiar with or had made a purchase at Citi Trends. Our goal was to gain insight into a number of things, including merchandise preferences, retailer preferences, frequency of visits and other information. We do think the survey results would be valuable as we move forward in building strategies to better meet the needs of our customers.

In addition, the strategic initiatives include a review of our organizational structure designed to ensure that we have adequate resources and that those resources are focused on our priority areas. Also, we are performing an analysis of our systems infrastructure to ensure that IT is prepared to fully support the merchandising and other needs of the business. And from a real estate perspective, we are considering a variety of strategic opportunities, including remodeling, relocating or expanding our existing stores and opening new stores, including in predominantly Hispanic markets.

We are off to good start thus far in the third quarter with comparable store sales up 4% during the first 2-plus weeks of August despite going up against a 9% increase in the same period a year ago. Considering our recent sales trends, together with the shift in merchandise mix more towards the growing non-apparel areas and our favorable inventory position, we expect comparable store sales to increase 1% to 3% in the back half of the year leading to earnings per diluted share in a range of $1.30 to $1.50 for the full year.

Now Leila will open it up for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Mike Morales with Walthausen & Co.

All right. We'll continue with the next question, Mr. Morales.

(Operator Instructions) Our next question is from the line of Eric Beder with SCC Research.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [2]

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Could you talk a little bit about the share repurchase plan and kind of how -- what you're doing? I see you guys bought a little bit of your shares back. Do you still consider kind of where the stock is right now worthy of being -- utilizing cash for that?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [3]

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Yes. As you know, we have, over the past 4 years, now returned about $100 million to our shareholders in the form of repurchases and dividends, so it is an important part of our capital allocation. We've said historically that as long as we are over $80 million in cash and investments that we will return cash to the shareholders, and that has worked out well for us. And yes, we continued to buy in the second quarter, bought about twice as much as we bought in the first quarter. So year-to-date, we're at $4.5 million of purchases, and we have around $5 million left under the current authorization.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [4]

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Great. When you look at -- you mentioned the Hispanic market, I know you guys have been working on that. How is the Hispanic market a little different than some of the core markets we have right now? And how desirable do you view that market?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [5]

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Yes. The demographic is probably actually larger than the traditional demographic that we are serving, so it is an important opportunity for us. There are nuances of serving a customer that we have learned through our stores that serve a combination of traditionally African American and Hispanic customers we have. I think it's 36 stores that already have at least 40% of the population within 3 miles of them being Hispanic. So we're already serving that customer to an extent today. The new stores that we're opening up are in markets where it is 90% to 100% Hispanic. And so there are some different things in merchandising that we're -- that we have to do. Some of it involves sizing, some of it involves fashion versus core and some of those things. So those are the high points.

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Eric Martin Beder, Small Cap Consumer Research, LLC - CEO & Consumer Analyst [6]

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Great. And last question. So you've seen -- it's been a little bit tough to figure with some of the inventory shifts that you've been doing kind of how the categories have been changing. Have you seen in some respects a kind of permanent shift to reduction in apparel? And how should we be thinking about, going forward, the split between the products and if it drives any particular margins with it?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [7]

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Sure. So as far as what we've seen and what we expect to execute going forward, today, about 60% of our business is apparel, so 40% non-apparel. And that has grown over the past 6 or 7 years. It was probably in the low 20s -- non-apparel was probably in the low 20s if you went back 6 or 7 years ago. So it's been a consistently growing area for us. We have made merchandise shifts along the way to facilitate that -- the non-apparel lines, and what we've said is that we will continue to do that. And looking long-term, or I should probably say midterm, I think that getting to 50% apparel versus non-apparel is not out of the question. Not sure that we would ever go higher than that because it is still important to be an apparel store in these neighborhoods that we operate in, but we certainly think that there's some runway there to continue to take the non-apparel piece up.

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Operator [8]

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The next question is from the line of [John Lawrence], private investor.

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Unidentified Participant, [9]

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Yes. Could you comment just a little bit -- I know you've had some initiatives on the transportation and some other sort of initiatives underway. Can you give us a little update on, digging through the numbers, on how some of those are progressing?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [10]

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Yes. So as I mentioned, I guess it was last quarter, we have been working with a consulting group on both the inbound and the outbound sides of freight. To this point, we have made a lot of progress on the inbound side, particularly renegotiating contracts with our suppliers and some new suppliers or transporters. That has gone extremely well. It really hasn't shown up in the numbers yet because the new contracts were not effective until early in the second quarter, and freight -- inbound freight in the second quarter goes straight into inventory because we have to capitalize about 1 quarter's worth of freight cost. So as that benefit rolls out in the third quarter, we will see some benefit in freight and expense. The freight out piece is lagging the freight in piece, but we're still working on a number of things in that area, including the new transportation management system and then also a strategy to reduce the outbound cost.

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Unidentified Participant, [11]

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Right. And is it too early -- have any of the Hispanic stores been opened yet?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [12]

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Yes, we've opened 2. Both of them opened in the second quarter, so it's still early. And we probably won't give any store-by-store information just for competitive reasons, but I will tell you from what we've seen from the first 2 openings that we want to continue to test that market and, in fact, have a third store that is coming up later this year.

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Unidentified Participant, [13]

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Right. And last question from my standpoint. When your store -- when did the easy comparisons really start with that Women's business? Was it mid- third quarter? Or was it earlier than that, that -- when that business really turned soft?

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [14]

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Yes. It was really later in August and then through the rest of the quarter, so it's a little bit over 2 months of the quarter.

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Operator [15]

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Mr. Smith, there are no further questions on the phone lines at this time, so I'll turn the call back to you.

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Bruce D. Smith, Citi Trends, Inc. - President, CEO, Secretary & Director [16]

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Okay. Thank you, everybody, for joining today. And as always, I'm available for one-on-one calls if you want to talk to me later this week. Thanks.

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Operator [17]

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That does conclude the conference call for today. We thank you all for your participation, and we ask that you please disconnect your line.