Citi Trends Q3 2007 Earnings Call Transcript

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

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 ConferenceCall. Today’s call is beingrecorded. At this time for openingremarks and introductions I’d like to turn the call over to the Chief FinancialOfficer, Mr. Bruce Smith. Please goahead, sir.

Bruce D. Smith

Thank you Robbie. Goof afternoon everybody and thank you for joining us today. Also on the call are Ed Anderson, Chairmanand Chief Executive Officer and George Bellino, President and ChiefMerchandising Officer. Our third quarterearnings release was sent out at 4:00 PM eastern time today. If you’ve not received the release it isavailable on our company website under the investor relations section at www.CitiTrends.com. You should be aware that prepared remarksmade during the call may contain forward looking statements within the means ofPrivate Securities Litigation Reform Act of 1995 and management may makeadditional forward looking statements in response to your questions. These statements do not guarantee futureperformance, therefore, undue reliance should not be placed upon them. Such statements involve known and unknownrisks, uncertainties and other factors that may cause the actual results todiffer materially. We refer you to thecompany’s most recent report on Form 10K filed with the Securities and ExchangeCommission for more detailed discussion of the factors that could cause actualresults to differ materially from those described in any forward lookingstatements.

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

R. Edward Anderson

Good afternoon everyone and thank you for joining thecall. I will provide an update on ourbusiness, discuss issues affecting the third quarter results and provideupdates on future plans. Then, BruceSmith will review the third quarter in more detail and review our guidance for2007. First about third quarter sales,as we mentioned on the second quarter call, sales in the first three weeks ofAugust were very good up approximately 16% from comp stores. We attributed those increases to a transferof sales into the third quarter due to later school openings and the movementof the tax free days in Florida and Texasinto the third quarter. Unfortunately,sales slowed down quickly at the beginning of the quarter and ran 5-6% compstore decreases until the last week of the quarter. The weather was unseasonably warmer throughmost of the second half of the quarter but, we saw a little cooler weather thelast week of October and saw sales increase 4% that week.

The quarter comp sales increased 1.9% on a comparable weekbasis. Sales for the same 13 weeks lastyear increased approximately 5% in comp stores. After a solid first week of the fourth quarter, the last two weeks havebeen soft and comp store sales are now up 1.5% through the first three weeks ofthe fourth quarter. The third quartersales in the merchandise category for comparable stores on comparable week basiswere as follows: children’s up 6% versuslast 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% lastyear. After being flat with last year aspercent of our total business in the second quarter, sales of nationallyrecognized 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 thecontinued poor performance of non branded denim continue to be issues in the women’s’business. We introduced our proprietarybrand Ruff Ryders at the end of the second quarter. After a so-so start with our first deliveriessales have picked up nicely with our second deliveries and the brand isperforming well in men’s, women’s and children’s.

Now about the operating results for the third quarter. Two factors account for the disappointingresults in the third quarter. Sales wereup only 1.9% in comp stores. We were expecting5-6%. Heavy clearance markdowns were essentiallythe entire reason for the 3% point drop in gross margin and account for asignificant portion of the profit decline from last year. We took aggressive markdowns to move summermerchandise and in some cases to move slow selling fall merchandise. The unseasonably warmer weather caused lesscustomer traffic and required even more markdowns to move goods to prepare forholiday. We believe that we took all themarkdowns that we need to take in the third quarter.

One of our objectives for the quarter was to decreaseinventories and we did that. At the endof the quarter total inventories were up 26% over last year compared to 3% atthe end of the second quarter. Compstore inventories were up 8% at the end of the quarter. Clearance markdowns decreased inventories asdid lower receipts of merchandise. Westill own too much inventory and too much of inventory is marked down. However, we believe we are reasonably wellsuited for the on coming fourth quarter and expect to deliver positive compsales, although modest. We expect tohave reduced inventory levels to the extent necessary by the end of the fourthquarter 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 wewere about 20 basis points better than a 2.7% comp decrease would suggest. We did have outside consultants perform adiagnostics review of payroll management and also store productivity. There were no huge problems found but we didget some excellent suggestions for improving payroll management and storeproductivity. In addition, medicalexpenses 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. Wecounted 137 store inventories in the quarter. The results suggest that we are on a plateau with store inventoryshrink. The results have stopped gettingworse but we have not yet started improving either. Last quarter we mentioned utilizing camerasystems with 24/7 monitoring to aide in shrinkage reduction. We have put many of these systems in sixstores and results are preliminary but encouraging. Importantly, store manager turnover hasimproved during the year after being over 40% for both 2005 and 2006 the ratefor October is down to approximately 20%. We believe if this turnover rate continues to improve that this willyield better inventory shrinkage results in the future.

We opened six stores in the third quarter bringing the 2007new store count to 29. We will open 13stores in the third quarter, five of them are already opened and the othereight will open this week. Of these 42new 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 ChiefFinancial Officer.

Bruce D. Smith

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

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

Gross margins for the quarter were 34.7% or 310 basis pointsbelow last year’s 37.8% gross margin. Virtually all of the decline resulting from an increase in merchandisemarkdowns as discussed. SG&Aexpenses were 32.6% of sales in the third quarter of this year versus 31.2%last year. The increase being dueprimarily to the expense deleverage that typically accompanies the 2.7%decrease in comparable store sales. Thiswas particularly evident in expense categories that are largely fixed which isoccupancy expense which is 80 basis points higher in this years’ thirdquarter. Ed mentioned payroll expensewas under much better control this quarter increasing only 40 basis pointsdespite the deleveraging affect that the negative comp store sales decrease hadon each fixed percent.

Appreciation expense for the quarter increased in a percentof sales from 2.4% to 3.3% as a result of capital expenditures incurred fornew, relocated and expanded stores and for new scanning technology used in thestores together with a deleverage on this fixed expense caused by the negativecomp store sales. Debt income for thequarter dropped from $2.8 million last year to a loss of about half a millionin 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 conditioncontinues to be in excellent shape with $52 million in cash and marketablesecurities and we have no debt. Totalinventories at the end of the third quarter were up $19 million or 26% overlast years’ third quarter. Storeinventories comprised $15 million of the increase with about 2/3 of it in newstores and the remainder in comparable store inventories which were up 8%. Distribution center inventory was up $4 millionall of which related to additional close out buys to be held until the nextseason. This pack and hold inventory was80% higher than at the same time last year as we continue to take advantage ofopportunistic buys.

We get a guidance for the full fiscal year, we are loweringour earnings per share guidance to a range of $0.91-$0.96 per diluted sharebased on year-to-date trends and consideration of last years fourth quarterwhich included an extra week. Thisguidance which includes a $0.04 charge for expenses related to a secondarystock offering is based on a comparable store sales increase of approximately1-2% for the year on a comp week basis which implies comps that are slightly upin the fourth quarter. With last years’fourth quarter having 14 weeks, the loss of the extra week in 2007’s fourthquarter translates to a quarterly comp sales decrease of 6-7% on a fiscalfinancial reporting basis and a decrease for the full year of approximately1-2% on a fiscal basis.

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

Question-and-AnswerSession

Operator

(Operator Instructions) We’ll go first to ElizabethMontgomery 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 ofquestion, I guess first its good to see progress on the operational initiativesbut, I wondered if you guys had any sense of what the thought process behindyour customers slowing down was aside from the macro economics factors. Do you have the ability to reach out to themin any way to try to drive additional traffic into the store, number one? And then, second question on the inventory Iknow 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 holdinventory year-over-year and if he feels like that is a good strategy tocontinue with longer term or if that might not be part of the problem behindmaybe 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 badcold 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 thethird quarter and actually we’re seeing it as we begin the fourth quarter fromour perspective, in fact, most of the sales change in the third quarter was dueto 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 ourcustomers as we expect maybe some other people because of our customersresilience towards apparel buying. But,we clearly have a more negative outlook for our customers spending as we’vegone through the third quarter and now heading toward the fourth quarter. Something is causing the slowdown out thereand we all read the same thing you all do, the economy clearly is not in asgood as shape top to bottom as it was before and so we’re a little anxiousabout the fourth quarter and that is why we’ve trimmed our estimates back forthe fourth quarter down to flat to slightly positive sales. If you scroll back a quarter from before wewere looking at 5-6% comps for both the third and fourth quarter so we’vedefinitely pulled back.

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

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

George A. Bellino

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

Elizabeth Montgomery– Cowen & Co.

Okay. And, if I couldjust 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 doinguntil the last two weeks before Christmas. Black Friday which we just came through is not nearly as important forus as it is for other retailers, again, because we don’t do a lot of promotionsduring that time frame but, also because our customer spends late because ofeconomic status. So yes, we’re hugelylate and this year with one extra day it will be even later than it was lastyear.

Elizabeth Montgomery– Cowen & Co.

Okay. In the timethat you’ve been at Citi Trends have you seen a holiday season that has startedout 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 nowdoesn’t mean that its going to be slow but because, frankly, our sales resultswere soft in the third quarter and we started off the fourth quarter soft atjust a 1.5% comp and being soft the last couple of weeks doesn’t mean we can’thave a good holiday. We’ve had some extraordinarilygood holidays after soft starts and we are again [inaudible] relatively flatnumbers for the quarter and weather that wasn’t great last year so we’rehopeful that as we move closer to holiday we have some good weather and we havethese easy comps to go against. So, Ithink it’s not impossible for us to have a very nice holiday but, it is off toa 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 – CIBCWorld Markets

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

R. Edward Anderson

Historically Roxanne we have not been able to get leverageon a comp of flat or slightly up and we don’t expect it to do that thistime. Generally, we’re going to requiresomewhere in the 3% range of comp store sales increases before we get leverageon the expense line. So, there’s nothingbuilt in, in fact, there’s deleverage built in the guidance that we’ve givenyou. What was the other question?

Roxanne Meyer – CIBCWorld Markets

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

R. Edward Anderson

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

Roxanne Meyer – CIBCWorld Markets

Okay. Thanks, thatwas helpful. Then, my next questioncenters around square footage, I guess first just housekeeping, can you justgive us the ending square footage for third quarter and then second, at thispoint in time do you have any thoughts as to your square footage plans for nextyear? Any intentions to pull back there?

R. Edward Anderson

Yeah, the square footage at the end of the quarter was3,020,000selling square feet.

Roxanne Meyer – CIBCWorld Markets

Okay.

Bruce D. Smith

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

Roxanne Meyer – CIBCWorld 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 theinventory at the end of the fourth quarter. Can you just remind us, I’m sorry if I missed it, where you expectinventories to end up?

Bruce D. Smith

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

George A. Bellino

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

Roxanne Meyer – CIBCWorld 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. Goodafternoon.

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 afterhaving six month guidance numerous times already over the past year and doesthe new guidance assume a continuation of the soft results so far in thequarter?

Bruce D. Smith

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

Shaun Smolarz –Sidoti & Company LLC

Okay. Just tosummarize, so far in the quarter comps are up 1-2% and guidance assumes compsup 1-2%. So basically, if the currentsituation carries through throughout the quarter the current range should bealright?

Bruce D. Smith

Yes.

Shaun Smolarz –Sidoti & Company LLC

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

R. Edward Anderson

Okay those operating issues that we talked about at somelength on the second quarter call which we talked about being big issues in thesecond quarter results and we talked about the fixes of those issues. Inventory, we had said then that was a twoquarter issue and we made some good progress in the third quarter and we feellike we’ll work through it in the fourth quarter and be back on track as webegin the first quarter 2008. Payroll,we made some very good progress in managing payroll better in the third quarterand we did not get all the way to where we expected to be but, I think we’llmake some more progress in the fourth quarter and essentially have that issuebehind us as well. The third issues,inventory shrinkage as we said before, is a longer term fix and we hadsuggested that this could take until next year’s second quarter to befixed. I still think that timeframe isappropriate. I did report to you in theconference call script that with the results of the third quarter’s inventoriesbeing now at a plateau, the good news is that we believe that our inventoryshrinkage has stopped increasing and so we’ve plateau and with things going onwith store manager turnover going down and to the other issues appearing to besuccessful, we think we have it going in the right direction but, that hasn’tmanifested itself yet. But, we believeit 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 agoon store growth plans for next year, you said final budgeting for that hasn’tbeen 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 the20%?

Bruce D. Smith

I think the reason I got the question earlier on the phonecall was that people have asked us before if these operating results were softwould the company consider pulling back its growth and the answer to that isyes. If we didn’t resolve theseoperating issues in a reasonable period of time we would contemplate pullingback our rate of growth. But, again, nodecisions have been made on 2008 growth rate yet.

Shaun Smolarz –Sidoti & Company LLC

Okay. My finalquestion for now is I noticed in the press release you now operate in 19states, 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 alot.

Bruce D. Smith

Thank you Shaun.

Operator

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

Paula Kalandiak –Broadpoint Capital, Inc.

Good afternoon. Acouple of questions; the first one is with regards to your pack and holdprogram, in the couple of quarters that I’ve been following you it seems likethe amount of pack and hold has been up pretty significantlyyear-over-year. When are we going tostart 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 wellfor us, it’s our regular merchandises that are suffering. The fashion part of our business, theunbranded 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 holdprogram? Does it make up even 10% ofwhat is in your inventory?

George A. Bellino

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

Paula Kalandiak –Broadpoint Capital, Inc.

Okay. And then, myother question I wasn’t quite clear, something you said in the prepared remarksabout the inventory and I thought you indicated that you had taken themarkdowns that you needed to take in the third quarter but then, you also saidthat you had too much markdown inventory in your inventory so I was just tooconfused. I was wondering if you couldgo back to that?

R. Edward Anderson

Again, your first name is?

Paula Kalandiak –Broadpoint Capital, Inc.

Paula.

R. Edward Anderson

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

Paula Kalandiak –Broadpoint Capital, Inc.

Okay.

R. Edward Anderson

We took all the markdowns that we should’ve taken in thethird 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 commentabout the quality of our inventory. Thequality and what I said was that the markdown contents of our inventory ishigher than where we’d like it to be because we took such heavy markdowns andwe had more markdown goods carrying into the fourth quarter than we had lastyear there’s a higher element of markdown content in our inventory and so thatwas the comment about the quality was not quite as good as we’d like it tobe. That was my point.

Paula Kalandiak –Broadpoint Capital, Inc.

Okay. Thank you andgood 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 saymuch about the store that you just opened in Chicago but, how about some of thestores in some of your other new markets including, Detroit. How are those stores performing, I guessrelative 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 avery successful group of stores. Wereported on, I guess, our conference call back, maybe two back that theperformance 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 fullyear results for these stores but, it looks like the 2007 as a group areperforming better than initially and are running kind of evenly with the 2006group of stores which is good news because, that was another group of very goodstores for us. We have opened storesacross the country, again four stores in Detroit, up in Chicagotwo weeks ago, more stores out in Texas and Florida. We are very happy with the Detroitperformance, the stores out there have been performing very, very well. Chicago seems to have asolid opening, it was not spectacular but it was a very solid opening for thatfirst Chicago store. We’ve come back and added more stores in Cleveland,more stores in Columbus which have been extraordinarily good markets for us andwe’ve had other markets, in smaller markets for example in Spartanburg, SouthCarolina which we just opened in the last two or three weeks, was a barn burnerof a grand opening. So, we’ve had somegood openings. Again, the 2007 storesseem to be tracking by alignment with our previous years opening.

Patrick McKeever –MKM Partners. LLC

Okay. Then a questionon the bigger, well the competitive front overall; there’s been some movingpieces with the industry this year with D.E.M.O closing stores and just thegeneral consolidation that I guess just continues in the department storeinventory. So, a two part question andthe first part is just what are you seeing, I know you’ve got a big increase inyour pack and hold inventory right now but, just maybe you could talk about thequality maybe of the merchandise opportunities, the buying opportunities thatare out there? Are you seeing any newmerchandise from new vendors that you haven’t dealt with before? That kind of thing. Then secondly, just on the competitiveenvironment, 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 oreven Value Cityor AJ Wright?

Bruce D. Smith

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

George A. Bellino

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

Bruce D. Smith

Patrick, on the competitive front there are operatorscontinuing to open stores. AJ Wright, Ibelieve they are opening a few stores and DDs is opening more stores, we’veseen DDs actually compete with us now in three or four different places inFlorida and we consider them high quality competition and there may be othersbut, those are the ones that come to mind.

As far as the general competitive front, this sort ofwondering what is holiday swift season up for, we have been watching the adsfor market factors and watching what the department stores are doing and we’rejust kind of amazed. We keep believingthat the amount of promotional activity can’t be increased into the next yearbut I think a lot of the big box retailers and discounters and big departmentstores are admitting to doing more discounting and promotions than ever so we thinkthis is going to be a very price intensive, highly competitive from that perspectiveholiday season. So, that makes us alittle anxious as well because I think it is going to be kind of a toughenvironment out there and I think a lot of people where you’d normally go afterthe apparel spending dollar are going to be promoting harder than ever.

Patrick McKeever –MKM Partners. LLC

Okay. Then, just aquick one on the shrink initiative. Isthat just a you walk in the store and there’s a flat screen monitor right abovethe 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 thirdparty is monitoring that information? Or, are you monitoring that information?

Bruce D. Smith

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

Patrick McKeever –MKM Partners. LLC

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

Bruce D. Smith

Exactly. We done fiveor six of them so far and we are expected to add another 10 stores to thatlist. It does take a while to get thesestores installed, these devices do require DSL lines in each store which has afairly 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 myquestions have been answered, just a couple of quick things. Just kind of to get a little bit more clarityaround gross margins here in the fourth quarter, are you expecting gross marginimpression just because of the comp being a little bit slower or because you’realso seeing some compression due to fourth quarter markdown expectation?

R. Edward Anderson

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

Quentin Mannard –Morehead Capital

Gotcha. Now, as faras 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 thatwe’re doing in Darlington, South Carolina expanding our large distribution center upthere. We’re about doubling the size ofit. That is going well. The construction is on pace to be completedby mid March of 08. We expect to be operationalin that building by mid March 08.

Quentin Mannard –Morehead Capital

Great. Thank you somuch. As far as, I know you were talkingabout having an initiative to improve management turnover, do you have aspecific goal to where you’d like to see it and what you think is reasonable toexpect? And also, kind of a time frameyou’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 forthe operation at Citi Trends but, if we can get the number down to 25 over thenext 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 questionsfor you. Once, regarding some of yournew markets. I know Detroit has reallygone off gangbusters, I was wondering if you could give us a little bit of reflectionon Miami and Indianapolis, because I remember you saying earlier those weregood 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 marketsearlier. We talked about the mid west and we talked about Clevelandand Columbus is doing particularwell. We’ve done reasonably well insales in Indianapolis and Dayton aswell and we’ve done very well in Miami. The only market where Citi Trends has reallynot 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 morethan a million dollars but I think the other stores are actually doing thecompany average which is $1.5 million.

Quentin Mannard –Morehead Capital

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

Bruce D. Smith

Well, we’re clearly not going to give up on Baltimore. I have pretty much concluded that the issuewith Baltimore for the most parthas been that we probably enhanced that made some poor site decisions that wereally didn’t just get into the right kinds of markets for us at the rightprice. But, we’re going to continuethere because the opportunity for us is for a very large number of stores inthe Baltimore area and we have seen some falls in a couple of the stores butsome of the other stores have really not moved so I guess we’ve seen some lifein 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 Baltimorewe’re just going to be really careful about how much we add to Baltimoreover time.

Quentin Mannard –Morehead Capital

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

Bruce D. Smith

Quentin, this issue of stock buy backs, we get thisquestion, I think, on most of our conference calls and other questions fromstock holders. Delivery returns to stockholders is clearly on our mind and this issue of stock buy backs never goescompletely out of our minds, we talk about it around here a lot and we willcontinue to talk about it but, we are conservative managers and we are arelatively small apparel retail business in the out price and close outbusiness and I think that we need to have a conservative balance sheet and thatallows us to get the right kind of inventory and terms from our vendors withoutquestion everyday. We do have about $50 millionin free capital on our balance sheet and having $50-60 million cash on thebalance sheet really in my mind today isn’t an outsized number for a companyour size and the kind of business we operate in. As I said before though, as the company doescontinue to generate positive cash, at some point in our future we will bebuying back stock. Most likely not doingdividends but doing stock buy back but, not today.

Quentin Mannard –Morehead Capital

Great. Well, thanksso much and good luck for next quarter.

Bruce D. Smith

Thank you.

Operator

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

Phil DeFelice –Wachovia Securities

Hello guys. All myquestions 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 - PiperJaffray

Good afternoon. Ijust have a couple of quick questions for you. You’ve been able to reduce your store manager turnover from 40% down to30% and I know you hired somebody recently in, I think, over from Ross Storesis there anything on that front that you can share with us on where thatimprovement is coming from and what you guys are doing from a trainingperspective?

Bruce D. Smith

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

Shaun Knotin - PiperJaffray

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

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 getthe Darlington distribution center up and running is weare going to implement a new warehouse management system. So, that’s going to be a fairly basiswarehouse management system that will be the first piece of a longer termlarger logistics plan for the company but, again, that’s coming on probably thesecond half of 2008. Nothing else of anyconsequence at this time.

Shaun Knotin - PiperJaffray

Okay. Great. And then, final question, somebody hadalready mentioned this before about the competitive landscape with D.E.M.Oclosing some stores obviously, then obviously Underground Station. What areyour thoughts about the future kind of the potential of the branded urbanbusiness and what does that potentially mean for your customer and where thepotential opportunities for Citi Trend in terms of share gain within thatmarket place as it evolves?

Bruce D. Smith

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

From a gross margin perspective, the brands and our nonbranded merchandise are essentially interchangeable. Basically what the urban African Americanconsumer wants and decides is currently fashionable is what Citi Trends willalways be selling them. But, we’re sortof indifferent about how much or how little brands we sell.

Shaun Knotin - PiperJaffray

Gotcha. Is thereanything specific that’s emerging today, I know you entered Gucci, is there anyother 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 nowvery strong again. Academics has comeon. [Inaudible] Gucci I mentionedearlier, those are the brands that are driving the business right now. South Pole is a major brand of an openingprice point brand that is very important to us.

Shaun Knotin - PiperJaffray

Okay. Great. Thanks so much for your time.

Bruce D. Smith

Thank you.

Shaun Knotin - PiperJaffray

Bye.

Operator

Thank you. Next we’llgo to Nick Perry with Lobes.

Nick Perry - Lobes

Hi. Can you give asense of where cap backs is for the year in terms of spend for the DC versusjust regular spend?

Bruce D. Smith

Yeah. We have not spent a lot yet on the expansion of theDC. We’ve spent about $18 million in capbacks year-to-date and most of the $15 million or so that is left in front ofus in DC is still out there we’ve only probably spent and incurred about $1 millionto 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 incomps is maybe fashion versus the customer not, or the customer being morecautious about their spending. I’mtrying to figure out, maybe looking at the categories, children’s seems to bestill pretty healthy, can you looking at that, I don’t know if you feel likeyou have the right fashions there and maybe not in the other areas? Just your thoughts in general on how much ofit is fashion, how much of it is just the economy?

George A. Bellino

In our children’s business it’s the infant toddlers businessis the stronger part of our business, the more fashion part is the young girls14 and bigger girls. There’s not reallya fashion direction and that’s been our struggle with juniors and girls. The infant toddlers they’re buying thebranded which is [inaudible] they’re spending it on the children. Onthemselves, 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, thelast several years, now over two years, we’ve had double digit drops indenim. Junior, the plus area and the girl’sarea. That’s the challenging part thereand there’s not really a fashion direction out there right now and I thinkthat’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, weexpect to do that business again. Tops,the top business, the longer belted [inaudible] tops. It was the print business that seems to begoing strong yet. [Inaudible] plaidshorts and print tops [inaudible].

Evren Dogan Kopelman– JP Morgan

Do you think your customers spend maybe now less of theirbudget 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 moreon 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 bitwhat the Easter calendar is going to look like this year versus last year? We know that impacts your business a lot andthen 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 signedfor 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’vealways like a later Easter, it gives customers a longer time to spend money onschool apparel so, this is a negative bringing the Easter in closer to thebeginning 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 untilafter Easter, which was the case with us. But, it is a more negative calendar.

Regarding leases, your question was how many leases do wetypically 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 outfrom a store opening and so as of right this minute in time to answer yourquestion, I have approved in the neighborhood of about 15 deals for the springalready. I think over half of them aresigned. I don’t know if that’s what youwere getting to or not.

Evren Dogan Kopelman– JP Morgan

Right. That was itexactly. Thank you. Good luck.

Bruce D. Smith

Sure.

Operator

Once again, as a reminder, if you’d like to ask a questionat this time it is star one. Next, we’lltake 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 likethe state of Florida is one ofthe weakest states currently in retail. How is Florida affectingyour results?

R. Edward Anderson

It’s been some of our poorest results and we’ve been lookingat our results – typically in the last three or two weeks because, maybe evensix weeks because of the weather, we’ve been waiting for the weather to turncool and stay cool. Obviously, in Floridaits warm most of the time. We’ve hadsome of our poorest results over the last two months or so in the state of Floridaand 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 Floridaso I’d say, I don’t know, 10% or so Shaun.

Shaun Smolarz –Sidoti & Company, LLC

Okay. Lastly, a fewminutes ago you mentioned in terms of merchandising you really strive to offerthe brands that your major customers desire. As you look at your current merchandise mix are there any brands thatyou think customers want that you currently don’t provide and if so, is that apotential 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’regetting quite a bit of Gucci, we could use more but, that’s the only one that Isee 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 soI’d like to turn our program back over to Mr. Ed Anderson for any additional orclosing comments.

R. Edward Anderson

Okay. We appreciateall 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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