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Edited Transcript of CTRN earnings conference call or presentation 15-Mar-19 1:00pm GMT

Q4 2018 Citi Trends Inc Earnings Call

SAVANNAH Mar 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Citi Trends Inc earnings conference call or presentation Friday, March 15, 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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* Luke Chamberlain Hatton

B. Riley FBR, Inc., Research Division - Associate

* Thomas A. Filandro

ICR, LLC - MD

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends Fourth Quarter and Full Year 2018 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded, Friday, March 15, 2019.

I would now like to turn the conference over to Tom Filandro, Managing Director, ICR. Please go ahead.

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Thomas A. Filandro, ICR, LLC - MD [2]

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Thank you, Alicia. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received the 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, Tom. Good morning, everybody, and thank you for joining us today. Also on the call is our Chief Financial Officer, Stuart Clifford; and our 2 merchandising Senior Vice Presidents, Christina Short and Brian Lattman.

In the fourth quarter, comparable store sales increased 0.2% on top of a 5.6% increase in last year's fourth quarter. Continued strength in Home and Accessories was almost completely offset by declines in the Ladies business and to a much lesser extent, Children's and Men's. The comparisons to 2017 were challenging for all 3 major apparel areas as each of them was up 6% to 7% in comparable store sales in last year's fourth quarter. Ladies was impacted more so than the other areas as there continued to be fashion misses in the fourth quarter that we first started to see in the third quarter.

We did a very good job of managing expenses during the fourth quarter, actually achieving 30 basis points of expense leverage on sales that were below our plan. From an earnings standpoint, diluted earnings per share increased 55% in this year's fourth quarter or 18% on an adjusted basis, driven by a much lower tax rate this year and fewer outstanding shares as a result of our stock repurchase program.

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

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

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Thanks, Bruce. Comparable store sales increased 0.2% in the fourth quarter and 1.6% for the full year. And looking at total sales, fiscal 2017 had 53 weeks. So fourth quarter and full year comparisons of total sales are impacted by having 1 fewer week this year.

In the fourth quarter, total sales decreased 5.2% to $201 million with more than all of the decrease coming from the loss of the extra week sales of $14.8 million in 2017. Total sales for fiscal 2018 increased 1.9% to $770 million. The full year comp sales improvement reflected an increase in the average unit retail of less than 2%, a 1% increase in the number of items per transaction and a 1% decrease in the number of customer transactions.

In looking at comp store sales from the various merchandise categories during the fourth quarter, the Home area increased 10% on top of an 11% increase in 2017 fourth quarter. This was the 22nd consecutive quarter of double-digit growth in our Home business. Accessories, including footwear were up 6% on top of a 3% increase in last year's fourth quarter. The Men's area was down 1% following a 6% increase in last year's fourth quarter. Children's sale were down 2% in the fourth quarter of 2018 after being up 6% last year. And the Ladies business was down 7% in this year's fourth quarter after increasing 7% in the same quarter last year.

For the full year, Home led the way with a 13% comparable store sales increase followed by Accessories at 4% and Men's at 1%, while Children's remained flat and Ladies saw a 2% decrease. Gross margin in the fourth quarter of 2018 decreased 80 basis points from the same quarter last year due primarily to a 60 basis points increase in markdowns associated with the slowdown in comparable store sales increases. For the full year, gross margin decreased 20 basis points as improvements and shrinkage were more than offset by higher freight costs caused by pressures in the trucking industry and higher fuel surcharges.

During the fourth quarter, we continued to produce leverage of SG&A expenses, lowering our expenses as a percent of sales to 30.6% from 30.9% in last year's fourth quarter. This leverage for the quarter was similar to what we experienced for the full year, where we had a 20 basis points improvement in the year-over-year expense rate comparison after adjusting for proxy contest expenses incurred in 2017. In continuing down the P&L, income tax expense for the year decreased $3.9 million from last year to $5.0 million due primarily to the decrease in the federal tax rate from 35% to 21% that was included in the Tax Cuts and Jobs Act that went into effect on January 1, 2018. In addition, 2017's tax expense included a $1.6 million one-time noncash write-down of deferred tax assets on our balance sheet due to this change in the federal tax rate.

Fourth quarter net income was $7.3 million compared with $5.2 million last year. Net income in the fourth quarter of fiscal 2017 was $6.9 million when adjusted for the effect of the income tax charge. Earnings per diluted share in 2018 fourth quarter were $0.59 compared with $0.38 last year or $0.50 per share when adjusting last year for the impact of the tax act. For the full year, net income was $21.4 million or $1.64 per share compared to $14.6 million or $1.03 a share in 2017. 2018's earnings per share increased 30% over last year's EPS of $1.26 adjusted for the proxy contest expenses and the effect of the tax act.

Now I will 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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Thank you, Stuart. In other fourth quarter developments, we successfully opened 7 new stores and relocated or expanded 2 stores, while closing 2 stores. For the full year, we opened 19 new stores, relocated or expanded 8 stores and closed 6 stores. Also in connection with our expanded capital return program, we returned $45 million to our shareholders in 2018 in the form of share repurchases and dividends. Since the initiation of the program in 2015, we have returned $94 million to our shareholders.

And looking forward, as we have entered 2019, sales are off to a slow start, decreasing 8% in comparable stores thus far during the quarter. Through mid-February, comp store sales were up 1%, similar to third and fourth quarter trends before significant volatility started to occur with the delay and IRS tax refunds relative to last year. As we went through the remainder of February, we had a nearly 2-week period where comp store sales declined every day, ranging from approximately 20% to 60% before sales turned positive again in early March. Unfortunately, the largest distribution of refunds by the IRS occurred at almost the same time that first of the month checks were received by some of our customers. It would appear that last year, our core customers made 2 shopping trips, one in February when they received their tax refund, and one in early March when they received their first-of-the-month check. This year it appears that a portion of those customers made only one shopping trip because we did not fully recover lost sales from the delay in tax refunds as we would have expected. In addition, total season-to-date IRS refunds are lower than last year by more than 3%.

In our guidance included in this morning's earnings release, we stated that we believe we will make up some of the loss in comparable store sales incurred thus far in the first quarter. However, we still expect to have a comp decline of approximately 3% for the full quarter. This assumption is expected to result in EPS ranging from $0.83 to $0.87 in the first quarter compared with $0.83 in last year's first quarter. For the full year, we are projecting earnings per diluted share to be in the range of $1.85 to $1.95 compared with $1.64 in 2018. This guidance is based on an expected increase in comparable store sales in a range of 1% to 2%.

We have a number of projects that we're excited about as we move further into 2019, including expected benefits from our efforts to better allocate merchandise on a store-by-store basis, initiatives to reduce freight costs and certain expense line items and enhanced warehouse packing system, which should improve our DC throughput efficiencies, and the implementation later this year of a markdown optimization system.

Looking longer term, we continue to focus on a goal of reaching $4 of earnings per share within the next 5 years through a combination of merchandising, planning and allocation enhancements, cost reduction initiatives and the return of excess capital to our shareholders.

Alicia, now we'll take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question come from line of Luke Hatton with B. Riley FBR.

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Luke Chamberlain Hatton, B. Riley FBR, Inc., Research Division - Associate [2]

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So you did a nice job managing expenses in 2018. Looking forward, does your annual guidance assume expense leverage or deleverage for 2019? And then, can you sort of quantify any of that or walk through the puts and takes that are going into that?

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

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Yes, I'll give you a little bit of a high-level guidance. Generally, we need a comp store sales increase around 2% to 2.5% to breakeven on leverage. Although the past 2 years, we've actually beaten that historical norm. However, while we provide earnings and sales guidance, we don't break out the other lines such as gross margin and expenses. However, there are some assumptions built into both areas regarding incremental improvement from the projects that we have going on that I mentioned earlier such as the efforts to reduce freight costs, efforts to reduce certain SG&A line items and the efficiencies in the distribution center from the enhancements to the packing system. So you should expect to see maybe a little bit of leverage in expenses within our guidance, but not a lot.

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Luke Chamberlain Hatton, B. Riley FBR, Inc., Research Division - Associate [4]

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Got it. And then expanding on the freight cost savings initiative, what exactly is that project? And then, sort of, can you frame the potential annualized savings that you expect to get once that is completed?

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

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Sure. Thanks, Luke. It's a multipronged approach, and includes everything from rebidding our inbound contracts and also likely expanding the base of our inbound suppliers, while at the same time, implementing a transportation management system that is designed to more efficiently allow us to select the lowest-cost routes each time. Then on the outbound side, we will also likely be rebidding the work and ultimately using the transportation management system to improve our efficiency on the outbound also. As far as quantifying that, we have not given guidance on that component yet of cost of sales.

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Operator [6]

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There are no further questions at this time. So ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.