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Citi Trends, Inc. (NASDAQ:CTRN)

Q3 2007 Earnings Call

November 26, 2007 5:00 pm ET

Executives

Bruce D. Smith – Chief Financial Officer

R. Edward Anderson – Chairman and Chief Executive Officer

George A. Bellino – President, Chief Merchandising Officer

Analysts

Elizabeth Montgomery – Cowen & Co.

Roxanne Meyer – CIBC World Markets

Shaun Smolarz – Sidoti & Company LLC

Paula Kalandiak – Broadpoint Capital, Inc.

Patrick McKeever – MKM Partners. LLC

Quentin Mannard – Morehead Capital

Phil DeFelice – Wachovia Securities

Shaun Knotin - Piper Jaffray

Nick Perry - Lobes

Evren Dogan Kopelman – JP Morgan

Operator

Good day and welcome to the Citi Trends Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions I’d like to turn the call over to the Chief Financial Officer, Mr. Bruce Smith. Please go ahead, sir.

Bruce D. Smith

Thank you Robbie. Goof afternoon everybody and thank you for joining us today. Also on the call are Ed Anderson, Chairman and Chief Executive Officer and George Bellino, President and Chief Merchandising Officer. Our third quarter earnings release was sent out at 4:00 PM eastern time today. If you’ve not received the release it is available on our 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 means of Private Securities Litigation Reform Act of 1995 and 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 upon them. Such statements involve known and unknown risks, uncertainties and other factors that may cause the actual results to differ materially. We refer you to the company’s most recent report on Form 10K filed with the Securities and Exchange Commission for more detailed discussion of the factors that could cause actual results to differ materially from those described in any forward looking statements.

Ed Anderson and I will provide you with some details related to the third quarter results after which Ed, George and I will address any questions you may have. Let me now turn the call over to Ed.

R. Edward Anderson

Good afternoon everyone and thank you for joining the call. I will provide an update on our business, discuss issues affecting the third quarter results and provide updates on future plans. Then, Bruce Smith will review the third quarter in more detail and review our guidance for 2007. First about third quarter sales, as we mentioned on the second quarter call, sales in the first three weeks of August were very good up approximately 16% from comp stores. We attributed those increases to a transfer of sales into the third quarter due to later school openings and the movement of the tax free days in Florida and Texas into the third quarter. Unfortunately, sales slowed down quickly at the beginning of the quarter and ran 5-6% comp store decreases until the last week of the quarter. The weather was unseasonably warmer through most of the second half of the quarter but, we saw a little cooler weather the last week of October and saw sales increase 4% that week.

The quarter comp sales increased 1.9% on a comparable week basis. Sales for the same 13 weeks last year increased approximately 5% in comp stores. After a solid first week of the fourth quarter, the last two weeks have been soft and comp store sales are now up 1.5% through the first three weeks of the fourth quarter. The third quarter sales in the merchandise category for comparable stores on comparable week basis were as follows: children’s up 6% versus last year; women’s 2% versus a -1% last year; men’s 1% versus 6% last year; home 1% versus 13% last year and accessories were -2% versus a 12% last year. After being flat with last year as percent of our total business in the second quarter, sales of nationally recognized brands comprise 50% of our total sales in the quarter versus 48% last year.

Sales of brands are driving the comp increase in women’s. Unlike the fashion direction and the continued poor performance of non branded denim continue to be issues in the women’s’ business. We introduced our proprietary brand Ruff Ryders at the end of the second quarter. After a so-so start with our first deliveries sales have picked up nicely with our second deliveries and the brand is performing well in men’s, women’s and children’s.

Now about the operating results for the third quarter. Two factors account for the disappointing results in the third quarter. Sales were up only 1.9% in comp stores. We were expecting 5-6%. Heavy clearance markdowns were essentially the entire reason for the 3% point drop in gross margin and account for a significant portion of the profit decline from last year. We took aggressive markdowns to move summer merchandise and in some cases to move slow selling fall merchandise. The unseasonably warmer weather caused less customer traffic and required even more markdowns to move goods to prepare for holiday. We believe that we took all the markdowns that we need to take in the third quarter.

One of our objectives for the quarter was to decrease inventories and we did that. At the end of the quarter total inventories were up 26% over last year compared to 3% at the end of the second quarter. Comp store inventories were up 8% at the end of the quarter. Clearance markdowns decreased inventories as did lower receipts of merchandise. We still own too much inventory and too much of inventory is marked down. However, we believe we are reasonably well suited for the on coming fourth quarter and expect to deliver positive comp sales, although modest. We expect to have reduced inventory levels to the extent necessary by the end of the fourth quarter and to be situated well for a good start to 2008.

Expenses were not a problem in the third quarter. We did experience deleverage as we had a 2.7% physical comp store sales decrease but not as much as expected. Store payroll was controlled much better. We did have some payroll deleverage but we were about 20 basis points better than a 2.7% comp decrease would suggest. We did have outside consultants perform a diagnostics review of payroll management and also store productivity. There were no huge problems found but we did get some excellent suggestions for improving payroll management and store productivity. In addition, medical expenses and professional fees came back in line for the quarter as well.

Store inventory shrinkage was 2% of sales in the quarter, right in line with our forecast. We counted 137 store inventories in the quarter. The results suggest that we are on a plateau with store inventory shrink. The results have stopped getting worse but we have not yet started improving either. Last quarter we mentioned utilizing camera systems with 24/7 monitoring to aide in shrinkage reduction. We have put many of these systems in six stores and results are preliminary but encouraging. Importantly, store manager turnover has improved during the year after being over 40% for both 2005 and 2006 the rate for October is down to approximately 20%. We believe if this turnover rate continues to improve that this will yield better inventory shrinkage results in the future.

We opened six stores in the third quarter bringing the 2007 new store count to 29. We will open 13 stores in the third quarter, five of them are already opened and the other eight will open this week. Of these 42 new stores and the 12 expansions will again exceed our stated goal by 20% additional funds square footage each year.

Now, I’ll turn the call back to Bruce Smith or Chief Financial Officer.

Bruce D. Smith

First I will review some additional details for the third quarter and then provide an update of our estimated earnings guidance for the remainder of 2007. Total sales for the third quarter were up 13.2% and our up 18.7% for the year-to-date. Discussing comparable store sales, the results on a comparable weeks basis are a better indicator of our true performance of our stores because they match up the same weeks in each year while the fiscal comps are a better indicator of what should be expected in the financial statements because they match up the actual week to sales in a respective year’s fiscals quarters.

Sales in comparable stores increased 1.9% on a comparable week basis, decreased 2.7% on a fiscal basis in the third quarter. This difference of almost 5 percentage points is a result of the third quarter last year, including the always strong first week of August whereas this year that week fell in the second quarter. Third quarter of 2007 picked up the first week of November which is a much smaller sales week then the first week of August. The year-to-date comparable store sales for comparable weeks were up 1.9% while on a fiscal basis they were up .7%.

Gross margins for the quarter were 34.7% or 310 basis points below last year’s 37.8% gross margin. Virtually all of the decline resulting from an increase in merchandise markdowns as discussed. SG&A expenses were 32.6% of sales in the third quarter of this year versus 31.2% last year. The increase being due primarily to the expense deleverage that typically accompanies the 2.7% decrease in comparable store sales. This was particularly evident in expense categories that are largely fixed which is occupancy expense which is 80 basis points higher in this years’ third quarter. Ed mentioned payroll expense was under much better control this quarter increasing only 40 basis points despite the deleveraging affect that the negative comp store sales decrease had on each fixed percent.

Appreciation expense for the quarter increased in a percent of sales from 2.4% to 3.3% as a result of capital expenditures incurred for new, relocated and expanded stores and for new scanning technology used in the stores together with a deleverage on this fixed expense caused by the negative comp store sales. Debt income for the quarter dropped from $2.8 million last year to a loss of about half a million in this years’ third quarter while diluted earnings per share declined from $0.20 per share to a loss of $0.04 this year.

Reviewing the balance sheet our financial condition continues to be in excellent shape with $52 million in cash and marketable securities and we have no debt. Total inventories at the end of the third quarter were up $19 million or 26% over last years’ third quarter. Store inventories comprised $15 million of the increase with about 2/3 of it in new stores and the remainder in comparable store inventories which were up 8%. Distribution center inventory was up $4 million all of which related to additional close out buys to be held until the next season. This pack and hold inventory was 80% higher than at the same time last year as we continue to take advantage of opportunistic buys.

We get a guidance for the full fiscal year, we are lowering our earnings per share guidance to a range of $0.91-$0.96 per diluted share based on year-to-date trends and consideration of last years fourth quarter which included an extra week. This guidance which includes a $0.04 charge for expenses related to a secondary stock offering is based on a comparable store sales increase of approximately 1-2% for the year on a comp week basis which implies comps that are slightly up in the fourth quarter. With last years’ fourth quarter having 14 weeks, the loss of the extra week in 2007’s fourth quarter translates to a quarterly comp sales decrease of 6-7% on a fiscal financial reporting basis and a decrease for the full year of approximately 1-2% on a fiscal basis.

Rob, if you could come back on, we’re ready to answer questions.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll go first to Elizabeth Montgomery with Cowen.

Elizabeth Montgomery – Cowen & Co.

Hi guys, hopefully you can hear me okay.

R. Edward Anderson

Yeah, hi Elizabeth, how are you.

Elizabeth Montgomery – Cowen & Co.

Okay. A couple of question, I guess first its good to see progress on the operational initiatives but, I wondered if you guys had any sense of what the thought process behind your customers slowing down was aside from the macro economics factors. Do you have the ability to reach out to them in any way to try to drive additional traffic into the store, number one? And then, second question on the inventory I know you said you still have too much inventory, too much of it marked down, I’m wondering how George feels about the 80% increase in the pack and hold inventory year-over-year and if he feels like that is a good strategy to continue with longer term or if that might not be part of the problem behind maybe some of the lack of freshness in the stores? And, I apologize for how I sound.

R. Edward Anderson

Beth, we understood you well and I think I had the same bad cold that you sound as if you may have as well.

Elizabeth Montgomery – Cowen & Co.

Yes, I do.

R. Edward Anderson

On customer slow down and traffic that we saw during the third quarter and actually we’re seeing it as we begin the fourth quarter from our perspective, in fact, most of the sales change in the third quarter was due to less transactions and from our perspective lower transactions. We think the macro issues still, you know, the sub prime lending and gas prices have probably still not affected our customers as we expect maybe some other people because of our customers resilience towards apparel buying. But, we clearly have a more negative outlook for our customers spending as we’ve gone through the third quarter and now heading toward the fourth quarter. Something is causing the slowdown out there and we all read the same thing you all do, the economy clearly is not in as good as shape top to bottom as it was before and so we’re a little anxious about the fourth quarter and that is why we’ve trimmed our estimates back for the fourth quarter down to flat to slightly positive sales. If you scroll back a quarter from before we were looking at 5-6% comps for both the third and fourth quarter so we’ve definitely pulled back.

As far as promotions go, as you know, we are on a pure everyday low price operator. We really don’t due special promotions and even in this environment we think it is better to stay true to our philosophy and stay true to our customers by trying to drive that initial price as far as we can. So, we haven’t done yet and we won’t be doing any special promotions as we go into the fourth quarter.

Now, your second question has to do with inventories and again, inventories are in better shape than they were before. 26% overall, 8% in comp stores but a piece of that inventory is a 80% increase in pack and hold and yes, you want to have George way in on the pack and hold buys.

George A. Bellino

Pack and hold historically have actually been more profitable and better gross margin than their normal buy. It’s predominantly branded merchandise that we are carrying. This is not new merchandise that has been out to the stores, this is merchandise we bought from a vendor and is in our warehouse holding for the next season. I’m pretty comfortable with the pack and hold number. We’ve been increasing it year-over-year and its been going very successful.

Elizabeth Montgomery – Cowen & Co.

Okay. And, if I could just ask one follow up, your holiday season is pretty back end weighted, right?

R. Edward Anderson

Yes, our holiday season is extraordinarily back end weighted. We won’t really know how Citi Trends is doing until the last two weeks before Christmas. Black Friday which we just came through is not nearly as important for us as it is for other retailers, again, because we don’t do a lot of promotions during that time frame but, also because our customer spends late because of economic status. So yes, we’re hugely late and this year with one extra day it will be even later than it was last year.

Elizabeth Montgomery – Cowen & Co.

Okay. In the time that you’ve been at Citi Trends have you seen a holiday season that has started out very slow, potentially negative and has it came through okay?

R. Edward Anderson

Yes, in fact, it’s happened several times. So, just because things are slow right now doesn’t mean that its going to be slow but because, frankly, our sales results were soft in the third quarter and we started off the fourth quarter soft at just a 1.5% comp and being soft the last couple of weeks doesn’t mean we can’t have a good holiday. We’ve had some extraordinarily good holidays after soft starts and we are again [inaudible] relatively flat numbers for the quarter and weather that wasn’t great last year so we’re hopeful that as we move closer to holiday we have some good weather and we have these easy comps to go against. So, I think it’s not impossible for us to have a very nice holiday but, it is off to a slow start so far.

Elizabeth Montgomery – Cowen & Co.

Okay. Thanks guys.

Operator

Thank you. Next, we’ll go to Roxanne Meyer with CIBC.

Roxanne Meyer – CIBC World Markets

Good afternoon. First, I was just hoping to get a little bit more clarity I guess on it relates guidance on SG&A, are you able to get any potential leverage on that flat or modest comp? And also, if you could maybe just a little bit better explain the composition of your SG&A for the third quarter.

R. Edward Anderson

Historically Roxanne we have not been able to get leverage on a comp of flat or slightly up and we don’t expect it to do that this time. Generally, we’re going to require somewhere in the 3% range of comp store sales increases before we get leverage on the expense line. So, there’s nothing built in, in fact, there’s deleverage built in the guidance that we’ve given you. What was the other question?

Roxanne Meyer – CIBC World Markets

I guess your explanation for the third quarter on SG&A is there any, can you I guess, provide a little bit more detail on how the SG&A faired versus last year?

R. Edward Anderson

As I mentioned, the biggest component was occupancy expense which is logical because, that is probably the most fixed of all our expenses. The rent line as well as things such as utilities, repairs, maintenance, taxes and licenses, things like that they are not going to change in great extent regardless of what sales due whether they go up or go down. There is one component within the rent that is a percentage rent but, we don’t have that in many of our stores and it’s not significant enough to outweigh the other components that are fixed. So, about 80 basis points increase was related to occupancy another 40 was related to payroll expense and the rest was as stated, relatively minor items.

Roxanne Meyer – CIBC World Markets

Okay. Thanks, that was helpful. Then, my next question centers around square footage, I guess first just housekeeping, can you just give us the ending square footage for third quarter and then second, at this point in time do you have any thoughts as to your square footage plans for next year? Any intentions to pull back there?

R. Edward Anderson

Yeah, the square footage at the end of the quarter was 3,020,000selling square feet.

Roxanne Meyer – CIBC World Markets

Okay.

Bruce D. Smith

On square footage growth for 2008 we haven’t made final decisions yet on 2008 for those rates.

Roxanne Meyer – CIBC World Markets

Okay. And then last, I just wanted to I guess, go back to inventory. It sounds like you said you are going to be comfortable with the inventory at the end of the fourth quarter. Can you just remind us, I’m sorry if I missed it, where you expect inventories to end up?

Bruce D. Smith

What I had said earlier I guess, in the conference call script was that we expected to be situation well by the time we got to the end of the fourth quarter to get 2008 off to a good start. George will talk to you a little bit about what our targets are for year end.

George A. Bellino

With our comps heading into January are going to be low single digits. The [inaudible] going to be in the low 20-25% inventory increase.

Roxanne Meyer – CIBC World Markets

Okay. Thanks. I think that’s it and best of luck.

R. Edward Anderson

Thank you.

Operator

Next, we’ll go to Shaun Smolarz with Sidoti.

Shaun Smolarz – Sidoti & Company LLC

Hi. Good afternoon.

R. Edward Anderson

Hi Shaun.

Shaun Smolarz – Sidoti & Company LLC

My first question relates to the guidance for the year. How confident in the new guidance after having six month guidance numerous times already over the past year and does the new guidance assume a continuation of the soft results so far in the quarter?

Bruce D. Smith

Shaun, regarding the guidance we do our best each quarter to do our best job at projecting the next several quarters out depending on where we are in the year and we’ve done that again for the fourth quarter this year and so, we’re comfortable with the guidance. It obviously has lots of assumptions in it, the key assumption is sales. We’re expecting sales to be modest, up 1-2% in the quarter and we’re expecting gross margin deleverage and a little expense deleverage. But, yes, I told you earlier that we’re up about 1.5% so far at the three weeks but, the big weeks are ahead of us and if we have modest sales increases, we feel very confident in this guidance.

Shaun Smolarz – Sidoti & Company LLC

Okay. Just to summarize, so far in the quarter comps are up 1-2% and guidance assumes comps up 1-2%. So basically, if the current situation carries through throughout the quarter the current range should be alright?

Bruce D. Smith

Yes.

Shaun Smolarz – Sidoti & Company LLC

Okay. Got it. The next question relates to three key issues: the inventory, store payroll and shrinkage. In terms of the goals and in terms of when to have and all those issues completely resolved, when should we look for each of those issues to be done with?

R. Edward Anderson

Okay those operating issues that we talked about at some length on the second quarter call which we talked about being big issues in the second quarter results and we talked about the fixes of those issues. Inventory, we had said then that was a two quarter issue and we made some good progress in the third quarter and we feel like we’ll work through it in the fourth quarter and be back on track as we begin the first quarter 2008. Payroll, we made some very good progress in managing payroll better in the third quarter and we did not get all the way to where we expected to be but, I think we’ll make some more progress in the fourth quarter and essentially have that issue behind us as well. The third issues, inventory shrinkage as we said before, is a longer term fix and we had suggested that this could take until next year’s second quarter to be fixed. I still think that timeframe is appropriate. I did report to you in the conference call script that with the results of the third quarter’s inventories being now at a plateau, the good news is that we believe that our inventory shrinkage has stopped increasing and so we’ve plateau and with things going on with store manager turnover going down and to the other issues appearing to be successful, we think we have it going in the right direction but, that hasn’t manifested itself yet. But, we believe it will and again, we think this will be solved by next year’s second quarter.

Shaun Smolarz – Sidoti & Company LLC

Okay. In response to a previous question a few minutes ago on store growth plans for next year, you said final budgeting for that hasn’t been completed but, I mean, is it possible that square footage growth of 20% might not happen next year, you might scale it back? Or, is the question to increase it above the 20%?

Bruce D. Smith

I think the reason I got the question earlier on the phone call was that people have asked us before if these operating results were soft would the company consider pulling back its growth and the answer to that is yes. If we didn’t resolve these operating issues in a reasonable period of time we would contemplate pulling back our rate of growth. But, again, no decisions have been made on 2008 growth rate yet.

Shaun Smolarz – Sidoti & Company LLC

Okay. My final question for now is I noticed in the press release you now operate in 19 states, what was the 19th state you opened in?

Bruce D. Smith

That would be Illinois. We just opened that first store last week in Chicago.

Shaun Smolarz – Sidoti & Company LLC

Alright. Thanks a lot.

Bruce D. Smith

Thank you Shaun.

Operator

Thank you. We’ll go next to Paula Kalandiak with Broadpoint Capital.

Paula Kalandiak – Broadpoint Capital, Inc.

Good afternoon. A couple of questions; the first one is with regards to your pack and hold program, in the couple of quarters that I’ve been following you it seems like the amount of pack and hold has been up pretty significantly year-over-year. When are we going to start to see the benefit of that as it makes its way into the stores?

George A. Bellino

Well, what is happening is our pack and hold is doing well for us, it’s our regular merchandises that are suffering. The fashion part of our business, the unbranded part is what’s been hurting us this past several months.

Paula Kalandiak – Broadpoint Capital, Inc.

How significant to your inventory is the pack and hold program? Does it make up even 10% of what is in your inventory?

George A. Bellino

Yes. That is about what it makes up, maybe a little more but, around 10%.

Paula Kalandiak – Broadpoint Capital, Inc.

Okay. And then, my other question I wasn’t quite clear, something you said in the prepared remarks about the inventory and I thought you indicated that you had taken the markdowns that you needed to take in the third quarter but then, you also said that you had too much markdown inventory in your inventory so I was just too confused. I was wondering if you could go back to that?

R. Edward Anderson

Again, your first name is?

Paula Kalandiak – Broadpoint Capital, Inc.

Paula.

R. Edward Anderson

Paula. Hi Paula, this is Ed Anderson and referring to the comments I made in the script about markdowns and about the quality of inventory I guess was what was referenced. What I said was that we had taken all the markdowns that we needed to take. In other words what I was trying to tell people was that we were faced with the need to take a lot of clearance markdowns because of soft sales in the third quarter and we took all those markdowns. The suggestion was we didn’t leave markdowns on the table to be taken in the fourth quarter.

Paula Kalandiak – Broadpoint Capital, Inc.

Okay.

R. Edward Anderson

We took all the markdowns that we should’ve taken in the third quarter.

Paula Kalandiak – Broadpoint Capital, Inc.

But, it’s still in the inventory, the markdown merchandise?

R. Edward Anderson

What I really wanted to say was to basically make a comment about the quality of our inventory. The quality and what I said was that the markdown contents of our inventory is higher than where we’d like it to be because we took such heavy markdowns and we had more markdown goods carrying into the fourth quarter than we had last year there’s a higher element of markdown content in our inventory and so that was the comment about the quality was not quite as good as we’d like it to be. That was my point.

Paula Kalandiak – Broadpoint Capital, Inc.

Okay. Thank you and good luck.

R. Edward Anderson

Thank you.

Operator

Thank you. Next, we’ll go to Patrick McKeever with MKM Partners.

Patrick McKeever – MKM Partners. LLC

Hi there Bruce.

Bruce D. Smith

Hey Patrick.

Patrick McKeever – MKM Partners. LLC

A question on your new stores, I’m sure its too early to say much about the store that you just opened in Chicago but, how about some of the stores in some of your other new markets including, Detroit. How are those stores performing, I guess relative to your expectations and then relative to other stores?

Bruce D. Smith

It looks like the new group of 2007 stores are going to be a very successful group of stores. We reported on, I guess, our conference call back, maybe two back that the performance of the 07 group was lagging a little bit from the 06 group. It looks like – with the information we have, of course, the information we have is not complete because we don’t have full year results for these stores but, it looks like the 2007 as a group are performing better than initially and are running kind of evenly with the 2006 group of stores which is good news because, that was another group of very good stores for us. We have opened stores across the country, again four stores in Detroit, up in Chicago two weeks ago, more stores out in Texas and Florida. We are very happy with the Detroit performance, the stores out there have been performing very, very well. Chicago seems to have a solid opening, it was not spectacular but it was a very solid opening for that first Chicago store. We’ve come back and added more stores in Cleveland, more stores in Columbus which have been extraordinarily good markets for us and we’ve had other markets, in smaller markets for example in Spartanburg, South Carolina which we just opened in the last two or three weeks, was a barn burner of a grand opening. So, we’ve had some good openings. Again, the 2007 stores seem to be tracking by alignment with our previous years opening.

Patrick McKeever – MKM Partners. LLC

Okay. Then a question on the bigger, well the competitive front overall; there’s been some moving pieces with the industry this year with D.E.M.O closing stores and just the general consolidation that I guess just continues in the department store inventory. So, a two part question and the first part is just what are you seeing, I know you’ve got a big increase in your pack and hold inventory right now but, just maybe you could talk about the quality maybe of the merchandise opportunities, the buying opportunities that are out there? Are you seeing any new merchandise from new vendors that you haven’t dealt with before? That kind of thing. Then secondly, just on the competitive environment, are you seeing any increased competition from some of the existing, the players that are in the business like, I don’t know, Ross Stores maybe or even Value City or AJ Wright?

Bruce D. Smith

Thank you Patrick. On the quality of merchandise available to buy on off close out basis, George will answer that question and I’ll talk about competition.

George A. Bellino

On the branded part we are getting more branded merchandise than we were before. [Inaudible] some of the regular priced retailers such as D.E.M.O we’ve been able to get more of it which has been good for us but, there’s also some of the brands that have sort of slacked off, they’re not in as much demand from our consumers as they were a year ago. Nike brand is one of them that has really dropped which was a big part of our ends business and a staple. But, there’s new brands coming up such as Gucci which is big right now with our consumers and we’re able to get that. It’s easier for us to get some of the brands like the Gucci that would be more difficult in a better environment.

Bruce D. Smith

Patrick, on the competitive front there are operators continuing to open stores. AJ Wright, I believe they are opening a few stores and DDs is opening more stores, we’ve seen DDs actually compete with us now in three or four different places in Florida and we consider them high quality competition and there may be others but, those are the ones that come to mind.

As far as the general competitive front, this sort of wondering what is holiday swift season up for, we have been watching the ads for market factors and watching what the department stores are doing and we’re just kind of amazed. We keep believing that the amount of promotional activity can’t be increased into the next year but I think a lot of the big box retailers and discounters and big department stores are admitting to doing more discounting and promotions than ever so we think this is going to be a very price intensive, highly competitive from that perspective holiday season. So, that makes us a little anxious as well because I think it is going to be kind of a tough environment out there and I think a lot of people where you’d normally go after the apparel spending dollar are going to be promoting harder than ever.

Patrick McKeever – MKM Partners. LLC

Okay. Then, just a quick one on the shrink initiative. Is that just a you walk in the store and there’s a flat screen monitor right above the entry way and it shows you being recorded as you walk in? Is that what that is all about? And then, someone is monitoring it, a third party is monitoring that information? Or, are you monitoring that information?

Bruce D. Smith

These 24/7 monitoring we’re doing that flat screen that you see walking into the stores, yes what you are seeing are images that are being recorded. There are very large numbers of cameras in the store, the back of the store and on the sidewalk that are actually being monitored 24/7 both from an audio and a video basis. So, these people are actually interactive in our stores. If you walk into one of our stores where this is going on you’ll see the call center actually calling the store and having a conversation with store managers during the day. This happens every hour all during the day. Yes.

Patrick McKeever – MKM Partners. LLC

So, now in terms of rolling it out why not move more quickly with that? Is it just expensive and you have to figure out if it is worth the cost?

Bruce D. Smith

Exactly. We done five or six of them so far and we are expected to add another 10 stores to that list. It does take a while to get these stores installed, these devices do require DSL lines in each store which has a fairly long lead time to it and the capital outlay is about $35,000 per store.

Patrick McKeever – MKM Partners. LLC

Okay. Alright. Thanks very much.

Bruce D. Smith

Thank you.

Operator

Next, we’ll go to Quentin Mannard with Morehead Capital.

Quentin Mannard – Morehead Capital

Hey guys, how are you doing today?

Bruce D. Smith

Good, how are you doing?

Quentin Mannard – Morehead Capital

I’m great. Most of my questions have been answered, just a couple of quick things. Just kind of to get a little bit more clarity around gross margins here in the fourth quarter, are you expecting gross margin impression just because of the comp being a little bit slower or because you’re also seeing some compression due to fourth quarter markdown expectation?

R. Edward Anderson

Well, a lot of it will hinge on the fourth quarter sales. So, you know, with the comps projected at flat to slightly up, there could be some markdown pressure. Probably not a lot of shrinkage pressure like last year though where the shrinkage rate was about 1.9 so it was pretty close to what we are running right now. So yeah, the pressure in the fourth quarter to the extent if the sales don’t get going we’ll be adding to the markdowns.

Quentin Mannard – Morehead Capital

Gotcha. Now, as far as your DC that you’re working on right now, how is progress going on that?

Bruce D. Smith

The question had to do with the significant expansion that we’re doing in Darlington, South Carolina expanding our large distribution center up there. We’re about doubling the size of it. That is going well. The construction is on pace to be completed by mid March of 08. We expect to be operational in that building by mid March 08.

Quentin Mannard – Morehead Capital

Great. Thank you so much. As far as, I know you were talking about having an initiative to improve management turnover, do you have a specific goal to where you’d like to see it and what you think is reasonable to expect? And also, kind of a time frame you’re hoping to get that in?

Bruce D. Smith

That’s really a good question Quentin. The gleam in my eye is 20%. I think that is probably too optimistic for the operation at Citi Trends but, if we can get the number down to 25 over the next 12 months or so, I think that’d be very good.

Quentin Mannard – Morehead Capital

Great. Great. Well, I guess I just have two other questions for you. Once, regarding some of your new markets. I know Detroit has really gone off gangbusters, I was wondering if you could give us a little bit of reflection on Miami and Indianapolis, because I remember you saying earlier those were good and also Baltimore because I know it had a little bit of a rougher start.

Bruce D. Smith

Well, I think I talked about some of our new markets earlier. We talked about the mid west and we talked about Cleveland and Columbus is doing particular well. We’ve done reasonably well in sales in Indianapolis and Dayton as well and we’ve done very well in Miami. The only market where Citi Trends has really not delivered up to our expectations at this point has been the Baltimore DC market. We have four stores in that market and all four of the stores do more than a million dollars but I think the other stores are actually doing the company average which is $1.5 million.

Quentin Mannard – Morehead Capital

Do you feel, I remember a little while ago you said you were seeing somewhat of a turn for those stores, are you feeling like at this point you’re going to be able to have them and you’re going to understand the dynamic in Baltimore?

Bruce D. Smith

Well, we’re clearly not going to give up on Baltimore. I have pretty much concluded that the issue with Baltimore for the most part has been that we probably enhanced that made some poor site decisions that we really didn’t just get into the right kinds of markets for us at the right price. But, we’re going to continue there because the opportunity for us is for a very large number of stores in the Baltimore area and we have seen some falls in a couple of the stores but some of the other stores have really not moved so I guess we’ve seen some life in a couple of them and a couple of them in my opinion is good.

Quentin Mannard – Morehead Capital

Great.

Bruce D. Smith

We’re going to keep tacking away in Baltimore we’re just going to be really careful about how much we add to Baltimore over time.

Quentin Mannard – Morehead Capital

Thank so much. The last thing, just on capital structure, you guys with the stock price where it is have you been thinking at all about buy back or dividends?

Bruce D. Smith

Quentin, this issue of stock buy backs, we get this question, I think, on most of our conference calls and other questions from stock holders. Delivery returns to stock holders is clearly on our mind and this issue of stock buy backs never goes completely out of our minds, we talk about it around here a lot and we will continue to talk about it but, we are conservative managers and we are a relatively small apparel retail business in the out price and close out business and I think that we need to have a conservative balance sheet and that allows us to get the right kind of inventory and terms from our vendors without question everyday. We do have about $50 million in free capital on our balance sheet and having $50-60 million cash on the balance sheet really in my mind today isn’t an outsized number for a company our size and the kind of business we operate in. As I said before though, as the company does continue to generate positive cash, at some point in our future we will be buying back stock. Most likely not doing dividends but doing stock buy back but, not today.

Quentin Mannard – Morehead Capital

Great. Well, thanks so much and good luck for next quarter.

Bruce D. Smith

Thank you.

Operator

Thank you. Next, we’ll go to Phil DeFelice with Wachovia

Phil DeFelice – Wachovia Securities

Hello guys. All my questions have been answered actually. Best luck for holiday.

Bruce D. Smith

Thank you sir.

Operator

Next we’ll go to Shaun Knotin with Piper Jaffray.

Shaun Knotin - Piper Jaffray

Good afternoon. I just have a couple of quick questions for you. You’ve been able to reduce your store manager turnover from 40% down to 30% and I know you hired somebody recently in, I think, over from Ross Stores is there anything on that front that you can share with us on where that improvement is coming from and what you guys are doing from a training perspective?

Bruce D. Smith

The laundry list of thing to improve store manager turnover is a very, very long one. It is a number of relatively small things in most cases. We believe that turnover has to do with – it starts with the hiring process, it has to do with doing the right amount of training and having the right kind of retention programs and we think we’ve tried to attack all three of those fronts very hard this year by making the hiring process easier to do to make it less encumbersome for the managers and regional managers so that they do a better quality job of hiring and not spending so much time on the process. On training, we think we actually have pretty good training programs in place but, again, following up to ensure that training is done because we believe that the people who feel adequately trained feel better about their job and perform better. And on the retention side, the company has improved some benefits, vacation benefits, some medical benefits about a year ago. Those kinds of things are the kinds of things we think help people feel better about the company and better about their job and I think those things and other things help you retain people. So, we were banging on these issues, we did start this last month we started this, you know, a year ago and we started working on it religiously and we’re now seeing the fruits of a lot of those labors but, it is a gradual process.

Shaun Knotin - Piper Jaffray

Sure. Okay. Then, on the system side are there any additional investments you guys are looking to make this quarter or out into next year with respect to managing payroll or doing stuff from a warehouse perspective, or a distribution center perspective? Are there any investments that you plan on making?

Bruce D. Smith

On the systems front there’s not going to be, I guess, revolutionary kind of things done over the foreseeable horizon. One thing that we will be doing after we get the Darlington distribution center up and running is we are going to implement a new warehouse management system. So, that’s going to be a fairly basis warehouse management system that will be the first piece of a longer term larger logistics plan for the company but, again, that’s coming on probably the second half of 2008. Nothing else of any consequence at this time.

Shaun Knotin - Piper Jaffray

Okay. Great. And then, final question, somebody had already mentioned this before about the competitive landscape with D.E.M.O closing some stores obviously, then obviously Underground Station. What are your thoughts about the future kind of the potential of the branded urban business and what does that potentially mean for your customer and where the potential opportunities for Citi Trend in terms of share gain within that market place as it evolves?

Bruce D. Smith

Well, as George spoke to you earlier about some of the brands and how some of the brands continually evolve in and evolve back out again, and there is clearly a lifecycle to certain brands and that lifecycle is three to five or six years it seems like. But, brands have been important sales trends for some time now and as you saw in the fourth quarter, nationally recognized brands represent about 50% of our business. Yet, those brands were different then they were a year ago and they were different then they were two years ago or three years ago and we would expect that they would be different brands next year, and the year after, and the year after. It is our style and operating philosophy to try and find those brands that our customers want. We don’t really care which brands they really are, obviously, we like doing business with certain people but, we are going after the brands that our customers tell us they want. Again, it’s our style to try to source the needs of our customers and quite frankly, if the branded business dropped down to 40% of our business or 45% that wouldn’t necessarily bother us if we were selling the fashions that our customers wanted.

From a gross margin perspective, the brands and our non branded merchandise are essentially interchangeable. Basically what the urban African American consumer wants and decides is currently fashionable is what Citi Trends will always be selling them. But, we’re sort of indifferent about how much or how little brands we sell.

Shaun Knotin - Piper Jaffray

Gotcha. Is there anything specific that’s emerging today, I know you entered Gucci, is there any other brands, or things, or trends that are out there in the market place?

George A. Bellino

[Inaudible] as slowed up the early part of the year is now very strong again. Academics has come on. [Inaudible] Gucci I mentioned earlier, those are the brands that are driving the business right now. South Pole is a major brand of an opening price point brand that is very important to us.

Shaun Knotin - Piper Jaffray

Okay. Great. Thanks so much for your time.

Bruce D. Smith

Thank you.

Shaun Knotin - Piper Jaffray

Bye.

Operator

Thank you. Next we’ll go to Nick Perry with Lobes.

Nick Perry - Lobes

Hi. Can you give a sense of where cap backs is for the year in terms of spend for the DC versus just regular spend?

Bruce D. Smith

Yeah. We have not spent a lot yet on the expansion of the DC. We’ve spent about $18 million in cap backs year-to-date and most of the $15 million or so that is left in front of us in DC is still out there we’ve only probably spent and incurred about $1 million to date.

Nick Perry - Lobes

And any sense of what cap backs are going to be for 07?

Bruce D. Smith

The year that we’re in right now?

Nick Perry - Lobes

Yes.

Bruce D. Smith

It is going to be somewhere in the low 30s, $32-33 million.

Nick Perry - Lobes

Got it. Thank you.

Operator

Thank you. Next, we’ll go to Evren Kopelman with JP Morgan

Evren Dogan Kopelman – JP Morgan

Hi guys.

Bruce D. Smith

Hi Evren.

Evren Dogan Kopelman – JP Morgan

Just trying to figure out how much of, I guess, weakness in comps is maybe fashion versus the customer not, or the customer being more cautious about their spending. I’m trying to figure out, maybe looking at the categories, children’s seems to be still pretty healthy, can you looking at that, I don’t know if you feel like you have the right fashions there and maybe not in the other areas? Just your thoughts in general on how much of it is fashion, how much of it is just the economy?

George A. Bellino

In our children’s business it’s the infant toddlers business is the stronger part of our business, the more fashion part is the young girls 14 and bigger girls. There’s not really a fashion direction and that’s been our struggle with juniors and girls. The infant toddlers they’re buying the branded which is [inaudible] they’re spending it on the children. On themselves, there’s not a real fashion direction or on the bigger girls. The denim business is still very soft for us, this is a big part of our business, has been the last several year but, the last several years, now over two years, we’ve had double digit drops in denim. Junior, the plus area and the girl’s area. That’s the challenging part there and there’s not really a fashion direction out there right now and I think that’s one of the reasons we’re struggling through this year.

Evren Dogan Kopelman – JP Morgan

What are you seeing for spring fashions then? Anything else?

George A. Bellino

Well, what ended last year strong was the flat shorts, we expect to do that business again. Tops, the top business, the longer belted [inaudible] tops. It was the print business that seems to be going strong yet. [Inaudible] plaid shorts and print tops [inaudible].

Evren Dogan Kopelman – JP Morgan

Do you think your customers spend maybe now less of their budget on apparel and more of it on other things like electronics?

George A. Bellino

I think they’ve moved somewhat to that. But, our customer base generally spend more on apparel than other customers [inaudible] a percentage of their total income.

Evren Dogan Kopelman – JP Morgan

Right.

George A. Bellino

Electronics has become more important. There’s big costly expenditure for it.

Evren Dogan Kopelman – JP Morgan

And then, two quick questions. First, can you maybe talk about a little bit what the Easter calendar is going to look like this year versus last year? We know that impacts your business a lot and then secondly, looking at, I don’t know if you would answer this question but, we’re trying to figure out maybe what percent of leases usually you have signed for the out year at this point of this year? So, maybe what percentage of leases are signed for 2008?

Bruce D. Smith

Two very different questions Evren. The first one was on the Easter calendar, Easter moves closer to the beginning of the year by one week.

George A. Bellino

The worse calendar we can have.

Bruce D. Smith

We view that as negative. In the retail business we’ve always like a later Easter, it gives customers a longer time to spend money on school apparel so, this is a negative bringing the Easter in closer to the beginning of the year by a week. Well, the good news here is that the weather was so miserable last year for Easter, it was so cold, that most people didn’t really see any spring selling until after Easter, which was the case with us. But, it is a more negative calendar.

Regarding leases, your question was how many leases do we typically have signed for the next year at this point in time?

Evren Dogan Kopelman – JP Morgan

Right.

Bruce D. Smith

We typically don’t sign leases not until 120-150 days out from a store opening and so as of right this minute in time to answer your question, I have approved in the neighborhood of about 15 deals for the spring already. I think over half of them are signed. I don’t know if that’s what you were getting to or not.

Evren Dogan Kopelman – JP Morgan

Right. That was it exactly. Thank you. Good luck.

Bruce D. Smith

Sure.

Operator

Once again, as a reminder, if you’d like to ask a question at this time it is star one. Next, we’ll take a follow up from Shaun Smolarz with Sidoti.

Shaun Smolarz – Sidoti & Company, LLC

Hi guys, just a quick follow up question. Regarding the macro economy, it feels like the state of Florida is one of the weakest states currently in retail. How is Florida affecting your results?

R. Edward Anderson

It’s been some of our poorest results and we’ve been looking at our results – typically in the last three or two weeks because, maybe even six weeks because of the weather, we’ve been waiting for the weather to turn cool and stay cool. Obviously, in Florida its warm most of the time. We’ve had some of our poorest results over the last two months or so in the state of Florida and we’re not quite sure why that is other than its been hot down there.

Shaun Smolarz – Sidoti & Company, LLC

What percent of the comp base is Florida?

R. Edward Anderson

I think we had 24 stores in Florida. 24, 25 stores in Florida so I’d say, I don’t know, 10% or so Shaun.

Shaun Smolarz – Sidoti & Company, LLC

Okay. Lastly, a few minutes ago you mentioned in terms of merchandising you really strive to offer the brands that your major customers desire. As you look at your current merchandise mix are there any brands that you think customers want that you currently don’t provide and if so, is that a potential up side for 08 if you’re able to secure those brands?

George A. Bellino

Right now the most named is Gucci and [inaudible] we’re getting quite a bit of Gucci, we could use more but, that’s the only one that I see at this time.

Bruce D. Smith

Really, we get the brands that our customers want.

Shaun Smolarz – Sidoti & Company, LLC

Okay. Thanks a lot.

Bruce D. Smith

Thank you Shaun.

Operator

Thank you and at this time we have no further questions so I’d like to turn our program back over to Mr. Ed Anderson for any additional or closing comments.

R. Edward Anderson

Okay. We appreciate all of your questions on the call today and happy holidays to all of you.

Bruce D. Smith

Thank you.

Operator

That does conclude today’s conference. You may disconnect your lines at this time.

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