Citi Trends' CEO Discusses Q4 2013 Results - Earnings Call Transcript

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 |  About: Citi Trends, Inc. (CTRN)
by: SA Transcripts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends' Fourth Quarter 2013 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions). As a reminder, this conference is being recorded, Friday, March 14, 2014.

I would now like to turn the conference over to. Tripp Sullivan of Corporate Communications. Please go ahead, sir.

Tripp Sullivan

Thank you, Jasmine. Our earnings release was sent out this morning at 6:45 a.m. Eastern. If you have not received a copy of the release, it's available on the company website under the Investor Relations section at www.cititrends.com.

You should be aware that prepared remarks made during the 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, undue reliance should not be placed on them. We refer you to the company's most recent report on Form 10-K filed 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'd now like to turn the call over to Bruce Smith, Chief Financial Officer. Bruce, please go ahead.

Bruce Smith

Thanks, Tripp. Good morning, everybody, and thank you for joining us today. Also on the call are Ed Anderson, Chairman and CEO; and Jason Mazzola, Executive Vice President and Chief Merchandising Officer.

First, I will provide you with details related to the fourth quarter and full year results, and then Ed will discuss further the results and our business outlook, after which we will address any questions you may have.

Total sales in this year’s 13 week fourth quarter were $157 million, compared with $176 million in last year’s 14 week fourth quarter, with the extra week providing a sales benefit of $12 million in 2012 fourth quarter. Comparable store sales on a 13-week versus 13-week basis declined 3.5% as reflected in a 2% decrease in the average unit sale, together with slight reductions in the number of transaction and the average number of items per transaction.

Our merchandise category sales in the fourth quarter and comparable stores were as follows. Accessories were up 12% on top of a 12% increase in last year’s fourth quarter. The Home division was up 9% this year and up 6% in 2012 last year. Children's sales were down 6% this year and down 12% in the fourth quarter of 2012. The Men's department was down 6% this year, after being down 16% last year and Women’s was down 15% this year and down 24 last year.

Sales of nationally-recognized urban brands represented 31% of total sales in the quarter compared with 42% in the fourth quarter of 2012.

Total sales in this year’s 52-week fiscal year were $622 million, compared with $655 million in last year’s 53-week year, with the extra week at the beginning of fiscal 2012 contributing approximately $21 million to total sales. Comparable store sales were down 1.6% on a 52-week versus 52-week basis. The decline in comp store sales was reflected in an average unit sale that was lower by 7%, partially offset by an increase in customer transactions of about 3.5% and a 2% increase in the average number of items per transaction.

Cost of goods sold as a percentage of sales improved 400 basis points in the fourth quarter, due to significantly fewer clearance mark downs compared with a year ago as we entered and exited the fourth quarter with much lower inventory levels than the prior year. For the year, cost of goods sold as a percentage of sales improved 180 basis points, due primarily to strong inventory control measures taken by our merchandizing organization.

SG&A expenses decreased $2.5 million in this year’s fourth quarter as last year’s extra week included approximately $3 million of expense. For the full year, expenses declined $1.3 million, once again reflecting an extra week in 2012. As a percent of sales, SG&A expenses have increased to 33.1% in 2013 from 31.7% last year due to the deleveraging effect from a decline in comparable store sales, together with the loss of the extra week which had $21 million of sales and only $3 million of expense.

Depreciation expense decreased $500,000 in this year’s fourth quarter and was down $2 million for the year due to the company’s fall back and store growth.

Regarding income taxes, note that we had an income tax benefit in fiscal 2013, despite having a $290,000 pretax loss. This income tax benefit was the result of work opportunity and other tax credits received as in prior years. Such tax benefits were more than enough to offset the pretax loss, resulting in net income for the year.

In 2013’s fourth quarter we had net income of $1.5 million or $0.10 per share, compared with a loss of $700,000 or $0.05 per share last year. For the full year, net income was $460,000 or $0.03 per share, while 2012 reflected a net loss of $2.2 million or $0.15 per share.

Our balance sheet position remained strong. Inventory was down 10.6% and cash, together with short-term and long-term investment securities totaled $85 million at yearend, and we continue to have no debt.

Now I'll turn the call over to Ed.

Edward Anderson

Good morning. We continued to make progress in the turnaround of Citi Trends. The fourth quarter results, while not as good as we had hoped they would be, nevertheless reflect the progress we’re making. Sales overall were disappointing at a negative 3.5% comp, but our Accessories business, including Footwear in particular, continued to be very good. We have managed our inventories well and have reduced our investments there. More importantly, the reduced inventory levels have allowed for significantly few returns mark downs and improved gross margin. And we managed expenses well in a difficult sales quarter.

The fourth quarter marks the end of 2013 and also the end of year two of our turnaround efforts. This turnaround is taking longer than I thought it would, but we’ve had significant work to do. Most of our problems have been merchandize related. We had a value problem. Our prices were not as compelling as they had been. We resolved that issue and as recently as 2011, almost 6% of our merchandize sales were traditional urban brands. Those brands were effectively our proxy profession. Those brands don’t even exist in Ladies anymore and are less important in the other apparel areas. And so we moved to non-branded fashion in apparel. That strategy, while not yet producing consistent results, is proving to be the right move.

In addition, we are expanding the businesses that are working. We have dramatically increased our accessories business. Footwear has been a huge success for us and we’ve increased substantially the Men’s and Children’s accessories businesses. And we have successfully expanded our Home business to include new categories.

And now I’ll provide an update on current sales trends. Total sales for the first five weeks of 2014 were $91.3 million, compared to $87.5 million last year. Sales in comp stores are up 5% compared to last year. As you probably remember, we tend to generate high sales during this five-week period due to the amount of business we do with customers that receive their tax refunds. Therefore we’re pleased to see that our customers have responded to our merchandise assortments.

From a growth perspective, 2014 will be another conservative year. We plan to remodel 20 to 25 stores, expand or relocate five to 10 stores and open five to 10 new stores. We’re very excited about our prospects for 2014. We have some sales momentum. Our strategies are working. We have a strong balance sheet and a team of associates dedicated to success at Citi Trends.

Thank you and Operator, we'll now take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And the first question comes from the line of Anna Andreeva of Oppenheimer. Please proceed with your question.

Steven Zaccone – Oppenheimer & Co.

This is actually Steven Zaccone on for Anna. First, you guys -- impressive gross margin there in the fourth quarter despite the heavily promotional environment. Can you just talk a little about what drove the strength in particular? And do you see opportunity to expand gross margins further in 2014?

Jason Mazzola

Sure. I can speak to a little bit of that. We do see continued opportunity in gross margin as we look to continually improve our inventory position, and further as we move some classification away from brands and into fashion, we see margin opportunity there. So I think it’s going to be a combination of those two things.

Steven Zaccone – Oppenheimer & Co.

And then shifting with apparel and talking about the mix of urban versus fashion, where do you expect to be at the end of 2014 for the mix?

Jason Mazzola

Currently, I think the year to date-- and Bruce, double check my numbers here, I think for the year we ended at approximately 33% in Urban brands. I see that number coming down a little bit in 2014 as really we’re exiting the Ladies urban branded business. And we still are looking for emerging brands and we have been able to find brands that resonate very nicely with our customer in Men’s and Kids, but Ladies is really a fashion oriented business right now. so like I said, I see that number coming down.

Steven Zaccone – Oppenheimer & Co.

And then just lastly, good work on the inventories. Where do you guys expect to end the first quarter?

Bruce Smith

If we look at it into 2014, and also think about where we came from, we’ve now cycled through four consecutive quarters where we had significant decreases in inventory, ranging anywhere from 6% to 16% depending on the quarter that you look at in 2013. So we have cycled through four quarters of it and therefore we think that any improvements would be incremental from here forward. We expect for the most part inventory to be flattish this year versus last year with maybe some changes, depending on which way -- which direction sales go. So we might have some movement in inventory that moves in tandem with sales, but other than that it’s pretty much going to be flattish.

Operator

(Operator Instructions). And the next question comes from the line of Pam Quintiliano with SunTrust Robinson Humphrey. Please proceed with your question.

Nick Hiatt – SunTrust Robinson Humphrey

This is Nick Hiatt. I'm on for Pam. First off, can you just give us an indication of how weather impacted your customer? And are you seeing that that has normalized at all? Secondly, we heard you mention a bump from early tax returns received. Is that similar to years past? Lastly, are you seeing an impact from the Affordable Care Act on your customers and any impact from heightened heating bills?

Edward Anderson

Okay. Affordable Care and heating bills, all right. sorry, I forgot --

Nick Hiatt – SunTrust Robinson Humphrey

I can repeat.

Edward Anderson

No, I think I got them. You asked about weather. You asked about the impact of tax refunds and the timing of them and you asked about the Affordable Care Act and heating costs. I’ll take them one at a time here. Weather; the good news is we had sales increase for the first five weeks of the year. We had a 5% comp and actually this is actually despite some fairly poor weather. The weather was markedly cooler and messier in January than previously. And the same thing was true in February. We had much more I guess we set a record, a 25 year record for the coldest February and I guess we had a lot more storms than we had in the past. So we had a lot more store closings and early and late openings and things like that this year than last.

But as far as the impact on our business, it was a negative impact, but I would say it was not a material negative impact on our business, but it was definitely a weight on our business in the first five weeks of the year. So weather was a negative, but the good news is we had positive sales despite the weather. As far as tax refunds go, our tax refunds this year were in a similar cadence to last year. Tax refunds started about a week later than last year. So that tax refund driven selling was captured in essentially the same weeks as last year. And the third impact, the impact on our customers of the Affordable Care Act and our customers over increased heating bills, I’d say I don’t really have a great answer for that. We have not seen or measured any impact of those two things.

The economy continues to weigh on our customer. We believe that the economy continues to weigh on the lower end customer more than the top end. And so things like changes in cutbacks in food stamps that occurred back in November, December continue to weigh on our customer. The employment situation continues to weigh on our customer. Fortunately we’ve anniversaried last year’s 2% payroll tax which I think was a pretty big hit. Food prices and gas prices actually I think are probably going in the other direction. That’s our take on the economy and our customer. Does that help you with your questions, Nick?

Nick Hiatt – SunTrust Robinson Humphrey

Yes, it definitely does. All very good information. Thanks a lot. Good luck on the quarter

Operator

Mr. Anderson, there are no further -- oh, actually there’s another question that just came up. It is from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Patrick McKeever – MKM Partners

So my question is just on the -- first of all the macro environment for your core customer. What are you seeing? What are you thinking there? Has there been any meaningful change? And then the competitive environment, anything going on there that’s worth noting? There’s been a few. I know these are not direct competitors, but there have been some bankruptcies, retailers going away. They’re going away. I guess I’m thinking of Dots. Do you see any potential benefit there? I know you have some stores that are in strip centers, close to the closing Dots stores for example.

Edward Anderson

Okay. Thanks for the questions, Patrick. On the macro environment for our customers, I was answering that question with the previous caller. I think the answer is it’s still tough for our customer. I don’t think it’s consequently worse than it was before, but also don’t think it’s much better either. I think while unemployment for our customers is slightly better, the employment growth numbers aren’t great. There’s a little bit of relief I think in gas prices and maybe food prices have been okay for our customer. I mentioned earlier that last year’s big negative was the payroll tax increase and then this year’s big negative coming from November forward has been the cut back in food stamps. But I would say it’s still very difficult for our customer and I think it is better, but it’s a sliver better than I would say three or four years ago.

Now moving to competition, you’re right, there had been a number of bankruptcies in specialty apparel retail this I guess January, February. The one you called out was Dots. There have been probably three or four other ones perhaps a bit smaller. And on the on the Dots front we do compete with Dots. We have stores in centers with them, but there’s not that many I would say across our five-store chain. There might be 20 or 30 store allocations that may overlap with the Dots. So we could have a slight negative impact as the stores are closed down and liquidated. But after that it all depends on the strength of who comes back. There could be no competitor to come back in that space that could be as good or better than they were before. But I don’t expect -- on the competitive landscape, the short answer to the question is there’s not significant changes going on right this minute.

Patrick McKeever – MKM Partners

And then just on the current trend, the up 5% same store sales through the first five weeks of the first quarter of 2014, were you saying that you don’t think that that is related to higher tax refund distributions this time versus a year ago, today versus a year ago? Because I think you said that the other cadence was about the same there, or are you thinking there is a tie in with the distribution of tax refunds?

Edward Anderson

I wasn’t addressing the size of the refunds. I think maybe you may have mentioned them in one of your articles on another retailer that you read that or knew that the tax refunds were actually higher this year. I wasn’t aware of that. What I am aware of is when refunds started this year, it was about a week later than last year and we watched -- and so the thing is the tax refund money came to our customers and what I meant by cadence was the timing is about the same. The timing was about a week later than last year and when the tax refund money came, I think our company was better situated this year than last. I think we have not turned to spring as well as -- last year as well as we could have. This year we did. And so we returned nicely to spring.

You may remember that I called our earlier that our fourth quarter sales were not as good in fall and winter. So the bad news was we missed some fourth quarter sales for being light in fall and winter. The good news is we were able to transition much quicker to spring. I think that’s helped us. I think we had healthier, better spring go-forward inventories when the taxes showed up. I think we’re better on point fashion wise in some of our fashion categories. And so I think it’s helping us. And so we don’t want to get too far ahead of ourselves because of these five weeks, but this is nice to have a nice positive trend.

Patrick McKeever – MKM Partners

And then is there anything -- I know you don’t give guidance, but you’ve got the 5% current quarter trend. You’re up against negative 4.1 comparison. Easter is three weeks later this year. That tends to be a positive, right? So is there anything we should think about as we look through the remainder of the first quarter that would perhaps help you build on that 5% or might bring that number down?

Edward Anderson

We don’t give guidance. And the best thing we can tell you is what we’ve done so far. I would point out to you that the sales pace of the first quarter, I did give you the sales numbers for the first five weeks and you know that those numbers are much higher per weekly average than the rest of the quarter will be. So we passed the biggest part of the quarter because the tax refund driven selling is bigger frankly than spring selling in general and bigger than Easter selling for us. So the later Easter, while it’s important, it will be a bump and it does move through April 20. I don’t see that as a huge positive frankly. So I can’t tell you we’re going to have the same sales increases for the rest of the quarter. Obviously it’s good momentum at the beginning and we’re optimistic about the rest of the quarter. But I don’t see a big lift coming from Easter as you suggest it might occur for us.

Operator

The next question comes from the line of Evren Kopelman with Wells Fargo. Please proceed with your question.

Evren Kopelman – Wells Fargo

I wanted to talk about the Women’s business a little bit. I think when you had released sales, you had mentioned in the fourth quarter some of the negative of maybe not having enough cold weather outerwear apparel. So could you address that a little bit more, flesh it out, the fourth quarter the Women’s trend? And then maybe these first five weeks, what have you seen? Have you seen an improvement in Women’s that I guess you would expect to see from the merchandizing initiative?

Jason Mazzola

Sure. I can address that question for you. While we were disappointed with our Ladies business in the fourth quarter, the pivot for fashion and away from traditional urban brands is absolutely the right strategy. Our fashion business continues to improve each and every week. It is still not at the level where it can cover the drop in traditional urban brands, but we are making very good progress there. In the fourth quarter, we were too conservative in our cold weather purchases and that would be along the lines of sweaters and long sleeved products as well as outerwear based on past years results and we definitely left sales on the table. We were able to make significant gross margin improvements in ladies in the fourth quarter, but we should have been able to deliver both sales and margin.

Our spring merchandizing mix right now in Ladies is off to a strong start this year and we’re looking for positive comps in Ladies as we move throughout 2014. And if you think about the branded penetration in Ladies sportswear, this quarter was 14% versus 34% last year at this time. And as we move through 2014 we’re up against a 28% penetration in the first quarter. But then in the remaining quarters of 2013, that urban ladies penetration fluctuates between 14% and 15%. So the hurdle to get over gets a little bit lower. So we are optimistic about our Ladies business moving forward and we see some nice positive trends in the spring business.

Evren Kopelman – Wells Fargo

So past the Q1 compared it’s a little different. The other question I had is on the accessories. You saw much momentum. Part of me worries that the compares are getting tough. Maybe talk about do you expect the momentum to continue there and where is accessories maybe now as a percent of sales?

Jason Mazzola

Bruce, help me on the accessories as a percent of sales please.

Bruce Smith

Yeah. For the full year accessories was 26%. In the fourth quarter it was 28%.

Jason Mazzola

And we actually do see some very, very nice momentum in these areas. Shoes were really the drivers of the accessories comp store sales increases. I think we’re offering great fashion at extreme values and we feel we are on point with the merchandize mix there. The customer is responding well to the merchandize offering across all genders, Ladies, Men’s and Kids. It’s not just one gender driving that business. We actually still feel we’re under penetrated in the shoe department. We see strong growth for 2014. Also in overall accessories in Ladies, Men’s and Kids accessories, all those are performing nicely as well. Like shoes, we felt as if we were underpenetrated in many of those areas and we also see continued growth in that area in 2014. So we feel overall very good about that business and the customer is responding to these fashion businesses.

Evren Kopelman – Wells Fargo

And then accessories, so for the year is 26%. Bruce, you said 20% for the fourth quarter. Where is Women’s now? Has accessories outpaced Women’s at this point?

Bruce Smith

For the full year Ladies was also 26% and for the quarter it was 22%.

Evren Kopelman – Wells Fargo

Then, I wanted to ask about SG&A. Obviously, you've been super disciplined with some of the topline pressures. But you mentioned some remodels this year, new stores, some expansions, relocations. I guess how should we expect SG&A -- I guess there's going to be some increase related to these initiatives, but the maybe corporate overhead and that kind of portion of SG&A, can we expect that to be, I don’t know, flattish, up a little bit? Like maybe you can talk about some of the SG&A expectations?

Bruce Smith

Yeah. There’s always a little bit of inflation in expenses, lower single digits. And you mentioned the relocations and expansions and remodels and so forth. We had a similar number of remodels in 2013. So it’s not like we’re going up against a number that had no activity and therefore no expense related to remodels. And so I think when you look out into 2014, you have the slight amount of inflation that you would expect. And other than that, I think the expenses -- we’re going to tend to have some variability based on which direction the sales go. But overall there’s really nothing unusual to expect in the expense line.

Evren Kopelman – Wells Fargo

Okay. And what do you expect CapEx and D&A to be for 2014?

Bruce Smith

CapEx in the range of $13 million to $15 million and D&A $21 million.

Evren Kopelman – Wells Fargo

$21 million. Okay. Maybe lastly I'll ask about, of course, the nice cash balance. Any updated thoughts on I guess what to do with that?

Bruce Smith

Nothing has really changed from our viewpoint as far as that goes. We believe we’re still in the midst of the turnaround. We’ve obviously made quite a bit of improvement from the large loss year that we had in 2011. But we still had slight pretax losses in 2012 and 2013. So there’s still work to do. And so at this point we’re going to still be conservative with our cash.

Operator

(Operator Instructions). And the next question is a follow up from the line of Anna Andreeva of Oppenheimer. Please proceed with your question.

Steven Zaccone – Oppenheimer & Co.

Thanks for the follow up. Just shifting to -- if you could elaborate on the deceleration in Men’s and Kids in the fourth quarter? And then, what do you see as the dynamics in that assortment, and maybe some areas of opportunity in 2014? Thanks very much.

Jason Mazzola

Sure. Men’s and kids was really similar to Ladies. We did not have the fourth quarter like we should have had in my opinion on sales. The major miss was the degree to which we underplayed cold weather classifications. While the brands in Men’s and Kids are not as explosive as they were several years ago, there are new brands emerging that resonate well with our customer and that are getting good traction. And actually some of the traditional urban brands still perform very well in both Men’s and Kids because the roots of a lot of these brands are centered -- were driven in the Men’s business and Ladies is almost like an add-on. So hoping Men’s and Kids, some of these brands still resonate very well. We did have nice margin improvement in both Men’s and Kids in the fourth quarter, but we definitely left sales on the table by not being positioned properly in cold weather classes. And we’re seeing some nice trends as we move forward into the spring. We’re happy with our spring mixes right now.

Operator

Mr. Anderson, there appears to be no further questions over the phone lines at this time. I will turn the call back to you to continue with your presentation or closing remarks.

Edward Anderson

Okay. Thank you all for joining the call today and hope everyone has a great day. Thanks.

Operator

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.

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