Citi Trends' (CTRN) CEO Edward Anderson On Q2 2014 Results - Earnings Call Transcript

Aug.20.14 | About: Citi Trends, (CTRN)

Citi Trends, Inc. (NASDAQ:CTRN)

Q2 2014 Earnings Conference Call

August 20, 2014 09:00 A.M. ET

Executives

Pat Watson — SVP and Principal at Corporate Communications

Bruce D. Smith – CFO and EVP

Edward Anderson - Chairman and CEO

Jason T. Mazzola - Chief Merchandising Officer and EVP

Analysts

Evren Kopelman – Wells Fargo

Anna Andreeva - Oppenheimer

Unidentified Analyst - SIG

Patrick McKeever – MKM Partners

Pamela Quintiliano - SunTrust Robinson Humphrey

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends' Second Quarter 2014 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, Wednesday, August 20, 2014.

I would now like to turn the conference over to Pat Watson with Corporate Communications. Please go ahead, sir.

Pat Watson

Thank you, operator. 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 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, you should not place undue reliance on these statements. 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. Please go ahead Bruce.

Bruce D. Smith

Thanks, Pat. 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 second quarter and year-to-date results, and then Ed will further discuss the results and our business outlook, after which we will address any questions you may have.

Total sales in this second quarter increased 5.2% to a $145 million, with comparable store sales increasing 5.3%. The higher comp store sales reflected a 7% increase in the number of customer transactions partially offset by an average unit sale that was 2% lower. Comparable store sales by month in the second quarter were up 5% in May, up 7% in June, and up 3% in July. As we have entered August, comp store sales have been up 5% for the first two weeks.

Our merchandise category, sales in the second quarter in comparable stores were as follows, home was up 28% on top of a 9% increase in 2013 second quarter. Accessories were up 24% this year and up 17% last year. Men's sales were up 1% this year after being down 5% last year. Children sales were down 1% after increasing 1% in the second quarter of last year and the ladies division was down 4% this year and down 7% in the second quarter of 2013.

Sales of nationally recognized brands represented 24% of total sales in the quarter compared with 29% last year. For the first half of the year total sales were up 4.2% and comparable store sales were up 4.7%. Cost of goods sold as a percentage of sales improved 100 basis points in the second quarter, due to the strong sell through of merchandise and continuing efforts by our merchants to control inventory.

For the year-to-date, cost of sales as a percent of sales has improved a 140 basis points. SG&A expenses were well controlled in the quarter with expenses as a percent of sales declining 100 basis points to 36.7% from 37.7% in the second quarter last year. The improvement in our expense ratio was due primarily to leverage on the fixed portion of our expenses from the 5% comp sales increase.

Year-to-date SG&A expenses as a percent of sales have decreased to 32.2% from 32.5% once again due to the expense leverage that results from higher comp store sales. Depreciation expense declined $600,000 during the quarter as a result of our pull back in new store growth. Impairment expense was also $600,000 lower due to the company's improved operating performance which has reduced the need for writing off fixed asset balances in underperforming stores.

The second quarter net loss in 2014 was $2.6 million or $0.17 per share down from a loss of $5.5 million or $0.37 per share last year. Year-to-date the company has net income of $6.5 million or $0.43 per share compared with $700,000 or $0.05 per share in last year's first half.

Our balance sheet position remained strong. Cash together with short-term and long-term investment securities totaled $102 million at quarter end. Inventory was flat with last year and we continued to have no debt. Now I will turn the call over to Ed.

Edward Anderson

Thank you Bruce and good morning everyone. The strong second quarter results reflect the progress we are making with a turnaround of Citi Trends. After a very good first quarter, the second quarter results were even better. In the second quarter we reported a 5.3% comp store sales increase, a 100 basis point increase in gross margin, 100 basis point decrease in SG&A expense, and $0.20 per share improvement in profitability.

The comp store sales increase of 5.3% was the best in over four years. And the increase came on top of a sales increase in last year's second quarter. We have now had comp store sales increases in four of the last five quarters.

Once again the accessories business including footwear was the driver of our sales increase. Accessories increased 24% on top of a 17% increase last year and represented 30% of our total business in the second quarter. All the accessories businesses men's, children's, and ladies accessories as well as footwear have been good for a while now and we have consciously grown these businesses to a larger percentage of our total business.

As we have reported previously we converted more selling floor space to footwear in 2013 and again in 2014. Additional space in inventory had driven the positive sales to date and we expect the remainder of the year to be strong for footwear and all of the accessories businesses.

The home business while still just 3% of our total business delivered a 28% increase on top of a 9% increase in last year's second quarter. The existing categories performed well as did several of the new categories we have tested. Again we see the home business continuing to be a larger part of our total business.

The apparel business did not perform as well as the non-apparel businesses but the men's business managed a 1% increase as that business is getting more consistent. As the ladies business decreased to just 4%, the best performance in four years, we expect to see positive sales comparisons from the ladies business soon.

We saw gross margin improvement again, the driver was lower markdowns as we have continued to make improvements in managing inventory. We opened four new stores near the end of the quarter. The stores are located in Raleigh, North Carolina; Smithfield, North Carolina; Shreveport, Louisiana; and Fresno, California. We have deals completed on an additional four stores which we plan to open later in the fall of this year.

We also plan to complete about 20 minor remodels and expand or relocate 8 stores in 2014. Our balance sheet remained strong with a large cash position and no debt. We are pleased to report another solid quarter. We believe our strategy is all working and we will deliver a successful 2014.

Now operator we will take any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And our first question comes from Evren Kopelman with Wells Fargo. Please proceed with your question.

Evren Kopelman - Wells Fargo

Thank you, good morning, and congratulations on the strong results.

Bruce D. Smith

Good morning.

Edward Anderson

Good morning Evren, thanks.

Evren Kopelman - Wells Fargo

I have a question about -- you mentioned August to-date comp trend up 5%, can you first remind us what that compares to in the first two weeks of August last year, the comp trend last year during those two weeks? And then secondly give us a little bit more colour maybe what's selling well, have you seen a lot of the back-to-school activity already, if you can comment on some of the denim trends -- a lot of the fashion denim we have seen in the stores that would be great?

Bruce D. Smith

Okay, on the August trends we mentioned, those results were for the first two weeks of August up 5%. Those same two weeks last year were up 2%, so its 5% against the positive 2%. I would point out to you about back-to-school that, back-to-school is important for us, and back-to-school, the biggest selling weeks of back-to-school are actually for us the last week of the July month and the first two or three weeks of the August month. And so those results we just reported to you already include back-to-school for us. So we are off to a good back-to-school so far. As far as the fashion trends that are driving back-to-school, Jason take that please.

Jason T. Mazzola

Sure, I would talk about one overall trend that we are seeing that we are very excited about, is the long denim selling and that's really across men's, kids, and ladies during July and August. So we have seen a very nice start to back-to-school denim selling. We are seeing a lot of good excitement there. Novelty washes as well Rips & Tears are performing very well. So we are excited about that.

Evren Kopelman - Wells Fargo

Thank you and then looking to the fourth quarter, obviously you have easier comparison given the performance in the fourth quarter the past few years and I guess how should we think about that? When you think about holiday as you kind of take the strength from back-to-school. I mean, it's easy for us to kind of think there should be a huge comp because of the negative numbers you are comparing against, but is there anything that we should keep in mind about that quarter, if there is a calendar or there is certain strategies you could share with us, how we should think about the fourth quarter, obviously it is a big quarter for you when we think about what we are modelling for comp growth for that quarter that would be great, thanks?

Edward Anderson

Okay, as you know Evren we don’t give guidance, sales or earnings guidance. But looking forward into the second half of the year, the quarter we are in now, the third quarter was up about a point last year in the neighborhood, and the fourth quarter was actually, I think negative 3 or so Bruce. We obviously were disappointed with the fourth quarter results last year and we thought in hindsight that some of the fourth quarter misses were sort of self inflicted and we -- in particular we talked about coat -- not being a stronger cold weather and it being as well -- this cold weather not just coats but the cold weather in general last year across many of our categories. And so we worked hard this year to make sure that we have fixed those mistakes and we think that we are much, much better prepared for seasonably appropriate apparel as we walk into the fourth quarter. So we are expecting the fourth quarter to be up. I am not going to tell you how much we expect it to be up but we are expecting to comp in the fourth quarter. Part of it is because it is an easy to compare like you said.

Evren Kopelman - Wells Fargo

Great, well, thank you and good luck.

Edward Anderson

Thanks.

Operator

Our next question comes from Anna Andreeva with Oppenheimer. Please proceed with your question.

Anna Andreeva - Oppenheimer

Great, thanks so much and congrats on really strong results guys.

Edward Anderson

Thanks Anna.

Anna Andreeva - Oppenheimer

I was hoping you could give us some colour by category. Congrats on men's business turning positive, I think you said for the first time in several quarters now, maybe just a little bit more colour what's driving that? Also on the women's business nice improvement there, maybe just provide an update when can we expect to see positive comps in that category? And then just curious on the children's category, that turned slightly negative. Are you seeing improvement in kids so far in August?

Bruce D. Smith

Sure, why don’t I start with ladies. The ladies business was down 4% in the second quarter and as we mentioned that, that was one of the best quarters we have had in a long time. However, the business on a week to week basis continues to improve and the fashion mix that we have put together is resonating nicely with our customer. We duly anticipate a positive comp store sales increases. We worked through 2014 with continued improvement in inventory turns and gross margin.

Last year the traditional urban brand penetration for the quarter was 15% versus only 1% this year in 2014 or this quarter in 2014. As we move to the balance of 2014 we are up again 15% or less penetration for each quarter coming from traditional urban brands and I do feel that as I just mentioned earlier we have a much better fall and holiday strategy in our ladies apparel area. So we are expecting good things there.

As we look at our men's and our kids business we are seeing improvement there as well both from an inventory turn and gross margin point of view. We have consciously leaned up our apparel inventories to drive sales through home, shoes, and accessories. But we do feel that we can drive both, drive sales and margin improvement and turn improvement in comps in those apparel areas. So we feel good about the direction of our apparel. I would tell you still the bigger focus is on our shoe accessory and home businesses.

Anna Andreeva - Oppenheimer

Okay, and can you just remind us, what is the profitability differential in accessories and home versus apparel?

Bruce D. Smith

We don’t really give out the exact numbers but we will tell you that the gross margin rates in accessories and footwear are higher than all the hanging apparel areas but we don’t disclose the exact gross margin difference. But it's definitely more there.

Anna Andreeva - Oppenheimer

Okay, great. And congrats on a nice gross margin beat for the quarter as well and this is now on top of the more difficult comparisons that you guys are lapping. How should we think about gross margin expansion for the back half and I think for the year you had talked about getting back to that 38% to 38.5% goal, looks like you guys are going to be at the high end of that number potentially this year, how should we think about gross margins looking out into 2015 and just kind of towards your goal of mid-single digit operating margins down the road?

Bruce D. Smith

Okay, our view of gross margin really hasn’t changed from what we talked on the call last quarter. We think the gross margin for all of the -- for the full year of 2014 will probably approach 38% but not get all the way back there. What we said all along is that our goal was to get to 38% to 38.5% in the foreseeable future and that really put me in all likelihood next year.

As we saw in the second quarter the improvement in gross margin in relation to last year is starting to narrow as we go up against some 2013 quarters that were more normalized. In fact last year's third quarter gross margin was 36.7% and that really wasn’t that different from what our third quarter margins were back before we started experiencing margin challenges in 2011. So the comparisons have been a little bit easier thus far in the year. They have tightened up some in the back half but we still think we will start to narrow in on 38% as we get close to the end of the year.

Anna Andreeva - Oppenheimer

Okay, terrific. And finally with the clean balance sheet and the cash position I think, 30% of your market cap, how does the Board view priority for cash?

Bruce D. Smith

Nothing's really changed related to cash since we talked last quarter. As always we do discuss this issue with the Board and in fact we have got a meeting next week, our regularly scheduled quarterly meeting with them. So it will be discussed again but nothing has changed.

Anna Andreeva - Oppenheimer

Okay, alright, terrific. Well, thanks so much and best of luck of guys.

Bruce D. Smith

Thank you, Anna.

Edward Anderson

Thank you, Anna.

Operator

Our next question comes from Tom Salendre (ph) with SIG. Please proceed with your question.

Unidentified Analyst

Hey guys let me add my congratulations, great job.

Edward Anderson

Thanks and good morning Tom.

Unidentified Analyst

Good morning. Jason, just a quick one on that denim comment that you made, are you seeing any changes in the silhouette of denim or is it just small washes and finishes?

Jason T. Mazzola

Their silhouette is still predominantly in ladies and girls it's predominantly still the skinny silhouette. And -- but what we -- where we are seeing good action is on the Rips & Tears and the Novelty washes. And that actually is translating into men's and boy's obviously with a different slant. But we are seeing a lot of new knits in fashion denim, so we are very excited about that.

Unidentified Analyst

Excellent, so back, I think it was back in the first quarter, you launched that -- your more comprehensive website which I think you have expanded since showcasing some of the products and trends in the stores. I was curious if you believe or have any way of knowing if the website is driving any incremental business? And a follow up to that is any consideration at some point to go live on the site?

Jason T. Mazzola

Oh yeah, as we mentioned on the last call, you are right, we did launch and you pointed that out and we are pleased with the launch and we are going to continue to improve that website on a weekly basis. We are very happy with it so far. I can't draw any co-relations to the new website and traffic. I don’t have that type of information as far as traffic to our brick-and-mortar stores but we are excited that we are. We are certainly getting more folks to visit the website. And as far as online selling, we do believe it is part of our future at Citi Trends. Our primary goal during this turnaround and where we are focusing all our efforts is to ensure our brick-and-mortar stores are driving consistent and profitable comp store sales. And as we get closer to that goal we definitely feel internet selling is a part of the future.

Unidentified Analyst

Excellent, then maybe a follow-up on the -- as it relates to that marketing, it appears you have taken out -- it appears you have taken a more aggressive social media position seeing you on Facebook, Pinterest, Instagram, can you just update us on your overall marketing spend, social media efforts and any initial successes that you can point to?

Bruce D. Smith

I don’t know if we give -- we have been asked this question a lot of time but we don’t spend a lot of money on marketing Tom, probably about a half of 1% annually on total marketing. So we are not going to give you the percentage breakdown. That's a small number obviously. But Jason could talk to you about what we are spending it on generally speaking.

Jason T. Mazzola

Sure, at a broad level we spend the money in a few different ways. We definitely still use local radio. We do in store signage, we do in store music so we will have sort of commercials about what's going on in the store over our music system. We play music during the times when we don’t want a commercial. And you are right, we are doing a lot on social media. We are exploring that, we think our customers are very engaged in that, so we like that as a platform. And we are starting to use our company website. So all those things are factoring and we are still fine tuning that to find out what -- where the right spend is for each of those buckets.

Unidentified Analyst

Thanks, great. And just one final one, a broader question, it seems like a lot of retailers are managing inventories much leaner this year going into the second half than they did a year ago, does that change in any way the availability of goods for you guys and towards the costing of goods in an environment like this?

Bruce D. Smith

No, the market right now is in great shape for us. There is a lot of goods in the marketplace. I know you would think we mean our inventories are people leaning off that, that the goods would dry up. But it just doesn’t happen. There is -- every single week there are more goods in the market then we could actually buy. So it is great as we can be very, very selective about the product that we are buying and I don’t see a cost issue there cause like I said there is still a surplus of products in the marketplace. So we are excited about that.

Unidentified Analyst

Alright, well congratulations again and best of luck for continued success. Thank you very much.

Edward Anderson

Thank you.

Operator

(Operator Instructions). And our next question comes from Patrick McKeever with MKM Partners. Please proceed with your question.

Patrick McKeever – MKM Partners

Okay, thank you. Another question on footwear, just on the -- I guess the question is how big a category do you think it can be. I know it has been growing nicely but would you be willing to take more space from apparel to continue to add footwear or do you think it is pretty well built out, at least from SKU, number of SKUs standpoint. I know it is constantly changing but and the other question on footwear is, I mean it doesn’t look like you have dedicated fixtures in men's footwear, you tend to use more of the table top approach but you have got fixtures in women's now and in kids as well so wondering if you will move to that approach in men's as well and may have put some dedicated fixtures in?

Jason T. Mazzola

I will answer that, I will do the -- I will talk about the dedicated fixtures. We definitely do have dedicated fixtures for men's footwear as well. We sometimes use the table approach because the business there is more branded out -- and our customers like actually the shoebox with the sneakers. So sometimes we display on tables but we actually do have in every store dedicated shoe racks as we do in ladies and kids. So we just display it slightly differently based on the customers taste.

And overall I will talk about shoes and I will give you a little bit about accessories just to talk about the growth and where we are going there. We do -- we have increased the penetration of both shoes and accessories in all Citi Trends stores and we actually have bought more shoe and accessory fixtures in both 2013 and 2014 and that has taken some of the apparel inventory down as we have used that space for shoe and accessory fixtures. And our customers have responded well to the merchandise and we will continue to increase the penetration of shoes and accessories as we continue to see positive sales trends.

We still feel underpenetrated in both areas and see continued growth for 2014 and beyond. We do not have a set penetration in mind as we are letting those businesses seek their own level based on performance. So as we continue to see good results, we will continue to expand on those areas. And that does mean slightly lower inventories in apparel but that has been a good thing for apparel.

Patrick McKeever – MKM Partners

And then a quick one on the August trends, the upside percents for the first two weeks of the month, do you think there was any -- or do you think there was a significant negative impact from the lost tax holiday in North Carolina, that's a pretty important state for you, right, it is almost 10% of your store base?

Bruce D. Smith

Let's see, yes. We did lose North Carolina this year. They did not anniversary the tax free holidays, the three day tax free holiday at the last week of July. What happened is Georgia moved their tax free holiday into that same week and by Georgia moving their tax free into that same week which was in front of Georgia back-to-school returns as well in front of the first month. Georgia tax free this year was actually larger than last year and it actually more than offset the North Carolina miss. But then in week one of August which is included in that 5% comp increase, we lost Georgia this year so net-net even with the North Carolina miss we have been up.

Patrick McKeever – MKM Partners

Okay, okay sounds good. And then just my last one, thinking out a little bit, you mentioned four of the past five quarters have been positive, positive same store sales. Are you ready to start thinking about ramping up the store growth yet and will it be too early to -- is 2015 too early for that, should we -- if that were to happen should we think about that as more of a 2016 event or do you have enough resources and is there enough real estate availability where you could get something going in a bigger way next year?

Bruce D. Smith

The 2015 is too early to ramp up growth -- new store growth significantly because again 4 out of the 5 last quarter but also looking at it, it has been 2 in a row and we would like to have to have more than 2 in a row. We are all going to take that up a little bit next year. This year we have said we would do 5 to 8, looks like we are doing 8. Next year I would expect us to do 10-15 stores. We think that's about the right move given where we are with our consistency. So we are looking for a little more consistency before we turn it up much more.

Patrick McKeever – MKM Partners

Okay, great. Alright, thanks very much.

Bruce D. Smith

Thanks Patrick.

Operator

And our next question comes from Pam Quintiliano with SunTrust. Please proceed with your question.

Pamela Quintiliano - SunTrust Robinson Humphrey

Great, thanks so much, and congratulations guys on a really phenomenal quarter. So, a lot of my questions have been answered but just a few for you. To follow-up on Patrick's question about new stores, are there any new regions that you may be looking at when you think about even the limited store growth that you are doing and then also remodel, if you could just talk a little bit about what's going on there, in your existing base?

Edward Anderson

There are I guess no significant new regions other than we have pretty much opened the lower 48 states up to our real estate department. So we are basically saying go for it. The one area that we have held off on and will hold off on for some time in the future is Greater Metropolitan New York. Outside of that pretty much any place is open for those states for us. You heard the four stores, two in North Carolina, one in Louisiana, and one in California. The four that are coming up, couple of them are in Ohio, one is in Illinois, and one is in South Carolina. So we don’t have a focused area. We are just taking it most of it as it comes to us. And what was the second part of your question.

Pamela Quintiliano - SunTrust Robinson Humphrey

Remodels.

Edward Anderson

Oh, remodels. Nothing has changed there. We have talked about doing 20-25 this year, minor remodels. We are going to do about 20 of those. Those cost us $40,000 to $50,000 a piece. And also the relocations and expansions are really major remodels for basically new stores that are put through relocation and we are doing 8 of those and those are important projects because we are taking existing high-performing stores and expanding or relocating them. So this would help as well.

Pamela Quintiliano - SunTrust Robinson Humphrey

Okay, and then turning quickly, I know lot of time has been spend talking about the back-to-school trends and how happy you are guys are with those. When we think about just how you approach back-to-school or looking ahead and I know it is still early with holiday but is there anything you are going to be doing differently in stores in terms of marketing, messaging to customers, are you going to be doing via ways again and having the opportunity there, just is there anything that we should be thinking about this year?

Edward Anderson

As far as -- you are talking about marketing for holiday.

Pamela Quintiliano - SunTrust Robinson Humphrey

Marketing for holiday or any different events you are doing in store. I know you touched base a little bit about what's going on online and the changes you have made there and then also was there anything you have doing differently these past few weeks with back-to-school in terms of how you were messaging to the customer or was it all the product that you had there?

Edward Anderson

Okay, at a high level in the third and fourth quarter particularly holiday, there will be no significant new marketing. We will anniversary last year's marketing events generally speaking including for example the levered promotion that we did last year in fourth quarter. We will do that again and I pointed out earlier on the call that we don’t spend a lot of money on marketing, it is about 0.5% or 0.6% of sales per year. We have in 2014 however, focused more of our marketing money in Q1 and Q4. So we are still to get more in Q1 and Q4, we did that this year in Q1 and we are going to do that same thing again in Q4. But you are not talking about huge dollars and the approach is going to be similar to what Jason pointed out earlier in the call. More money is spent on social media than we have in the past for sure. Still doing local radio and a lot of in store styling and that type of thing.

Pamela Quintiliano - SunTrust Robinson Humphrey

And then just the last question for you guys, health of your core customer, how you think they are doing in any shift that maybe worth noting?

Edward Anderson

I answered that question Pam with sort of my view of the -- so the macro level, as the health of our customer. Obviously we are encouraged by our sales. We are actually encouraged by traffic and we mentioned our traffic count. Our traffic count was actually up 7% in Q2 and we would like to see that. And we think that's a response to us delivering more consistent strong merchandise and strong base to our customers.

As far as the health of the customer though, the -- I think the as I said before and this continues that the macro environment is continuing to incrementally improve for our customers. And I will call out several things, unemployment for African-Americans has decreased again. It is still more than twice what is for Caucasians but it has decreased and it is in the 11% or 12% neighborhood down from mid-teens two or three years ago.

Consumer confidence is up, gas prices have actually come back a little, down a little bit and now we are over a year past last year's payroll tax increase which I called out as a big negative. And so those are positives. On the negative side unfortunately food prices are up and that is a headwind for our customers. But when I put those things all together I believe net-net probably not as good as things were four or five years ago, things are better now and incrementally getting better.

Pamela Quintiliano - SunTrust Robinson Humphrey

Great, thanks so much for answering my questions and best of luck with holidays. I can't wait to see what you guys do.

Edward Anderson

Great, thanks Pam.

Operator

We have no further phone questions at this time. I will turn it back over to you Mr. Anderson.

Edward Anderson

Okay, operator. Thank you very much, thank you everyone for joining the phone call today and have a great day. Thanks.

Operator

Ladies and gentlemen that does conclude the webinar for today. We thank you for your participation and ask that you please disconnect your line.

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