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CITI TRENDS Inc. (NASDAQ:CTRN)

Q4 2007 Earnings Call

March 26, 2008 5:00 pm ET

Executives

R. Edward Anderson – Chairman and Chief Executive Officer

George A. Bellino – President, Chief Merchandising Officer

Bruce D. Smith – Chief Financial Officer

Analysts

Jeff Klinefelter -Piper Jaffray

Evran Kopelman – JP Morgan

Shaun Smolarz – Sidoti & Company, LLC

Roxanne Meyer – Oppenheimer & Co. Inc.

Lyn Walther - Wachovia Securities

Rob Wilson - Tiburon Research

Brian Rounchek - BLR Capital Partners

Patrick McKeever – MKM Partners LLC

Quentin Mannard – Morehead Capital

Mark Cooper - Welch Capital Management

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 would like to turn the call over to the Chief Financial Officer, Mr. Bruce Smith. Please go ahead, sir.

Bruce D. Smith

Thank you, Michael. Good 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 Fourth Quarter Earnings Release was sent out at 4:00 pm ET today. If you have 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 meaning of the 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 Form10-K 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 fourth quarter results, and guidance for 2008. Afterwards Ed, George, and I will address any questions you may have.

Now I will turn the call over to Ed.

R. Edward Anderson

Thank you, Bruce, and good afternoon everyone.

First about fourth quarter sales. The company’s 2007 fiscal calendar year contained the traditional 52 weeks, whereas fiscal 2006 contained 53 weeks with the extra week falling in the fourth quarter. Accordingly, comparisons of total sales for the fourth quarter and full year of fiscal 2007 to the same periods in 2006 are affected by the extra week of sales in 2006. However, for comparable store sales the company is reporting on a comparable weeks basis. For example, the 13 weeks ended February 2, 2008, compared to the 13 weeks ended February 3, 2007. Total sales in the 13 weeks period ended February 2, 2008, increased 6.2% to $134.6 million compared with $126.8 million in the 14 week period ended February 3, 2007. Comparable store sales decreased 1.1 percent comparing the 13 weeks ended February 2, 2008, to the 13 weeks ended February 3, 2007. For the year total sales in the 52 week period ending February 2, 2008, increased 14.6% to $437.5 million compared to $381.9 million in the 53 week period ended February 3, 2007. The extra week last year contributed approximately $10 million of sales to fiscal 2006. The full year comparable store sales increased 1% comparing the 52 week period ended February 2, 2008, to the 52 week period ended February 3, 2007.

Comparable store sales, on a comparable weeks basis by month, for the fourth quarter were as follows: up slightly in November; down almost 5% in December; and up slightly in January. Now for comparable store sales by merchandise category for the fourth quarter. Sales decreased 1.1% across all categories. By category: children’s, up 2% versus up 11% in last year’s fourth quarter; women’s, down 1.5% versus down 5.3% last year; men’s, down 3% versus down 4.1%; home, down 4% versus up 0.3%; and accessories were down 6.6% versus up 7.3%. Sales of nationally recognized urban brands continued to perform better than non-branded merchandise and accounted for 51.5% of our total sales in the fourth quarter compared to 49.6% of the total last year.

Total company inventory at the end of the fourth quarter was 12.4% larger than last year and approximately 3% higher in comparable stores. Our objective in the fourth quarter was to reduce store inventories down to a low single digit comp increase. Despite a tough selling environment in the fourth quarter we did reduce our inventory levels very close to where we targeted. We reduced the inventory by more closely managing the open to buy and by taking aggressive markdowns.

Earnings per share results for the quarter came in at $0.59 per share and they are disappointing compared to last year’s $0.73. Last year’s quarter had an extra week but this year’s results include about $0.06 per share of probable one-time tax savings, which Bruce will explain in more detail later.

Comp sales, coupled with considerably higher markdowns, were the primary reasons for the decreased profits in the fourth quarter. We took higher markdowns due to softer sales as well as to ensure we opened 2008 with appropriate inventory levels to put brand-quality of inventory.

Now these higher markdowns had at least a 3% limited impact on fourth quarter gross margin. We believe that 2008 gross margin will not be negatively impacted by 2007 inventory issues.

Inventory shrinkage in the fourth quarter was 8.1% of sales flat with last year’s fourth quarter. We believe that inventory shrinkage has reached a plateau with a sharp increase in the second quarter.

Store manager turnover has decreased which we believe is a very positive sign and the early results of the 24/7 store camera monitoring systems have yielded very positive results as well.

We opened 13 new stores in the fourth quarter bringing to 42 total new stores in 2007. The 2007 new stores have performed well and we’re very pleased with results in the Detroit and Chicago markets. Additionally, we expanded 12 existing stores during the year. Year-end selling square footage increased 20.6% over 2006.

Now Bruce will go into more detail on the financial results for 2007, after which I will discuss our plans for 2008.

Bruce D. Smith

As disclosed in the press release total sales in the fourth quarter were up 6.2% and were up 14.6% for the year. Excluding the extra week in 2006, total sales for the full year would have been up 17.5%. Gross margin for the quarter was 35.2% compared to last year’s 38.4% margin. In all the decline was resulting from an increase in merchandise markdowns. The full year gross margin was 36.3% versus 38.3% last year. The markdown pressure in third and fourth quarter is representing the entire decrease in the margin.

Inventory shrinkage was 20 basis points higher for the full year but was offset by a slightly higher initial merchandise markup and slightly lower freight cost.

SG&A expenses were 24.4% of sales in the fourth quarter of 2007 compared to 24.7% in last year’s fourth quarter. Expenses were well controlled, particularly with the expense deleverage. Typically the company has a 1% decrease in comparable store sales.

Lower insurance costs, professional fees, and incentive compensation more than offset increases in occupancy and payroll expenses as a percentage of sales. The full year expenses increased from 28.2% of sales in 2006, 29.1% in 2007.

Depreciation expense for the quarter increased as a percent of sales from 1.9% to 2.6% as a result of capital expenditures incurred for new, relocated, and expanded stores and from new scanning technology used in the stores, together with the deleverage on this fixed expense caused by the comp store sales.

The company’s effective income tax rate was lower this year due to a combination of higher tax-free interest income on our investments and higher work opportunity income tax credits as the company has grown. At the same time the free-tax income for 2007 decreased in relation to the prior year. The effective tax rate for the fourth quarter was 28% versus 32.4% last year. For the full year the effective rate was 31% versus 33.2% in 2006.

Net income for the quarter was $8.4 million this year compared to $10.4 million last year. Diluted earnings per share was $0.59 versus $0.73 in 2006’s fourth quarter. The year net income was $14.2 million compared to $21.4 million last year. Diluted earnings per share was $1.00 versus $1.51 in 2006. As we discussed last year the extra week in 2006 was worth approximately $0.10 per share.

Reviewing the balance sheet, total inventories at year end were up over last year by $9 million, or only 12%, despite an increase of more than 20% in store square footage during 2007. As discussed in previous quarters our inventory was 20% higher year-over year at the end of the third quarter and was as much as 45% higher year-over-year earlier in 2007.

Accordingly we are pleased with where our inventory levels ended this year. Inventory in new stores comprised $7 million of the increase while the opportunistic buys that we refer to as pack-and-hold were up $5 million. This is the merchandise we typically buy at close-out prices near the end of a season to be held in our warehouse until the beginning of the next season.

Inventory in comp stores was up $1 million but when combined with distribution center merchandise ready for shipment to stores it was actually down $3 million compared to the end of 2006.

The company continues to have a strong balance sheet and adequate liquidity to fund its business. In fact, today the company has approximately $81 million in cash and marketable securities. $20 million of that is in over-night funds and operating accounts, approximately $5 million is in store bank accounts, and the remaining $56 million is invested in auction-rate securities. At this point we do not have a valuation problem with these securities and we have continued to classify them as current assets. Given the recent attention these securities have received in financial markets, I would like to provide more details on our holdings.

Our investments are in municipal auction-rate securities that are issued by state governments to fund student loans. They are all AAA and most are guaranteed by either the United States Department of Education or by insurance companies. The underlying securities have a long-term maturity, however, they have generally provided short-term liquidity through an auction process that resets the interest rate every 35 days and allows investors such as Citi Trends to either roll over their investments for another 35 days or sell them at par.

After our year end the demand for these types of securities at the auctions declined to the point where, like other companies, it was not possible for us to sell the securities. As a result, we rolled over our investments, typically earning higher interest rates than were being earned previously. As a result of interest rates increasing due to provisions in the notes, our interest rate on the entire portfolio was more than 2% higher than previously. Our yield is now well over 6% and since these securities are federally tax-exempt the taxable-equivalent rate is over 10%.

It is not yet clear how this market will react going forward. Some people believe that the secondary market will develop to purchase these securities or that the issuers themselves will obtain alternative financing and call the notes, particularly those that had increases in the interest rates that they are paying to investors such as us. But at this point there is no certainty due to the developments being so recent.

As you may have seen, we classify these securities as current assets on the balance sheet accompanying the press release. However, we have not yet decided whether our investments will be included in current or non-current assets when we do file our 10-K in April. The rule is if we don’t expect to be able to turn the investments into cash within one year of the balance sheet date, they will be reported as non-current assets. But for valuation—again, we do not have any evidence that would lead us to believe that the value of the securities is impaired, which would require a write-down

Student loans, which are the underlying collateral, have not experienced credit issues as has certain other segments of the credit market, such as the prime mortgages. Also the backing by the Department of Education and insurance companies help support the credit rating.

From a liquidity standpoint, today we have $20 million of available cash in addition to the $5 million in store bank accounts and the $56 million of auction-rate securities. Even at this level of available cash, we did want to be conservative and insure that we would experience no liquidity issues. We have obtained a $35 million credit facility with Bank of America. The interest rate, to the extent we have to borrow, will be LIBOR plus 1.5% and importantly this credit facility is unsecured.

Ed will now discuss our plans and our guidance for 2008.

R. Edward Anderson

Thank you, Bruce.

So far in 2008 sales have been good. After the first seven weeks of the first quarter, through this past weekend, our sales are up 10% in comparable stores. However, these results include Easter this year and Easter was two weeks later last year. I expect we’ll give back most of this sales increase in the next two weeks and likely end the first nine weeks of the quarter approximately flat with last year.

Our sales have really moved with the weather so far again this year. When it was warmer in last year earlier, our sales were good. But the weather in March has been cooler in the last year and our sales have been soft accordingly. The good news is that we have had some good spring selling as well as nice movement of clearance. Additionally, total inventory, after Easter sales, is essentially flat with last year and comparable stores’ inventory is about 10% less than last year. So we have made progress in pulling back the levels of inventory.

Expansion of our Darlington distribution center is just about complete. We will be operational in the expansion by May 1. This expansion takes us through at least 2010 before we will need additional warehouse space.

In the first quarter of 2008 we’ve opened 11 new stores and expanded three existing stores. We will open one more new store and expand one more store in the first quarter. New markets for the spring have included Flint, Michigan, and Lawton, Oklahoma. We’ve also added new stores in existing markets in Baton Rouge, Louisiana, Tampa, Florida, and San Antonio, Texas, and so far sales for this group have been very, very good.

While we’ve made solid progress on the issues of store manager turnover and inventory shrinkage, we think it’s prudent to pull back on expansion this year and I expect to open approximately 40 new stores in 2008 and expand approximately eight existing stores. This additional selling square footage will net approximately 15% increase over last year. Potentially while we have hit our new store targets in the past, we’ve had trouble opening stores as timely as we would have liked.

Accordingly, in January we brought in Steve Horowitz as our new Vice President of Real Estate. Steve brings a great deal of experience from off-price strip shopping center retailers to Citi Trends.

As we previously reported George Bellino, our President and Chief Merchant, is retiring this spring or summer. We believe we are close to completing the search for his replacement and will hopefully have an announcement to make fairly soon.

For earnings guidance for 2008 we expect earnings in a range of $1.10-$1.15 per diluted share. This guidance assumes an anticipated comparable stores sales increase up 2%-3%.

If the operator would come back on, we are now ready to answer your questions.

Question-and-Answer Session

Operator

All right. Thank you, sir. We will begin the question and answer session. (Operator Instructions) Our first question comes from the line of Jeff Klinefelter of Piper Jaffray. Please go ahead.

Jeff Klinefelter - Piper Jaffray

.

Yes, thank you. Ed, a couple of questions for you. First of all, could you talk a little bit about your new store performance—the 2005, 2006, and maybe 2007 classes—just giving us a sense for how they have performed in terms of the maturity curve and if there are any differences or nuances as you’ve move into the Midwest—as an example of a new market.

R. Edward Anderson

Okay, I’ll give you that answer at a high level, Jeff, and Bruce may fill in some of the blanks. The 2005 group of stores was a terrific group of stores followed by a group of stores that was just about as good in 2006. And the 2007 stores, obviously we don’t have full-year results for yet, but have performed very well and are exceeding our pro forma numbers. As far as geographically speaking, we are happy to report that from the Midwest, in the Cleveland area moving in to Detroit and Chicago this past year, we’ve have outstanding stores results.

Bruce D. Smith

I’ve got a couple of things I’ll add to that, Jeff. The sales in the stores that we opened in 2005 and 2006 reached $1.6 million on average during their first twelve months, and consistently achieved cash-on-cash returns in excess of 100%.

Jeff Klinefelter - Piper Jaffray

Okay, and how about the comp performance as those new store classes have matured in the following year? For the 2005 for example, is there anything outside of the normal average chain comp that you’re seeing?

Bruce D. Smith

No, there’s not. They’ve pretty much come in line with the rest of the stores and that’s not inconsistent with what we’ve seen with other stores, after their first full fiscal year.

Jeff Klinefelter - Piper Jaffray

Okay. So you’re not seeing any under-performing markets, in new markets that you’ve entered, at this point relative to your pro forma plan or your average in the last two years?

R. Edward Anderson

That’s exactly right. Our new store performance in new markets—and I guess the specific new markets you’re talking about are the Midwest markets of Columbus, Ohio, Cleveland, Ohio, Indianapolis, Indiana, Detroit, Michigan, and Chicago, Illinois—all those markets have performed as well or better than the averages of other markets. We still have one under-performing market, which we told you all in previous phone calls, that we still haven’t really solved yet, and that’s the Baltimore market. With that exception, when that market was first opened about three years ago, we’ve had outstanding success in all the other new markets.

Jeff Klinefelter - Piper Jaffray

Okay. So, essentially, your reason for bringing down your growth rate this year, slightly, in new stores would be simply getting better internal sort of practices or controls in place, it’s not a performance issue, it’s not an availability of real estate—is that correct?

R. Edward Anderson

That is absolutely correct. The reason we’ve pulled back on growth—and we suggested we were contemplating this last Fall but even though we hadn’t reached a decision—has to do with the issues we had with store manager turnover and the issues we had with store inventory shrinkages results. Those numbers were too high last year and we wanted to work on them and pull those numbers back to us. And we have had some good success but we thought it was prudent to give this a little while longer and so we decided to pull back. But it has to do with giving our store operations team a bit of a pause so we can solidify our operations. It has nothing to do with the success in new markets or the availability of real estate.

Jeff Klinefelter - Piper Jaffray

Okay. Another question would be on your guidance. In terms of the comp being 2%-3% for the year, you’ve just discussed the fact that you might be back to a sort of a flat run rate here in the next two weeks after adjusting for the Easter shift, for Q1. I know you don’t like to get into too much on quarterly detail but can you give us some sense for how you see these comps unfolding for the year in terms of comparing against the quarters last year? And then any other details on sort of margin and SG&A, given that we saw a deceleration in those throughout the year last year?

Bruce D. Smith

Yes, Jeff, on the comp question, we really don’t try to break that out by quarter. We have a range of 2%-3% for the full year and really don’t want to try to break it down any further than that.

Related to your question about gross margin and expense ratios, we do think we have a good opportunity to improve the gross margin in 2008, particularly the back half of the year, at all the markdown pressure in 2007. We may not get completely back to where we ran in 2005, 2006, but with those years we had 38. We may not make it all the way back there but we should make a lot of progress in getting a larger portion back in 2008.

As we’ve said before, on the expense issue if we can get to 3% comps then we have a decent chance of breaking even on the expense ratio. In other words, having no leverage or deleverage for south of that, even at 2%, we could have some deleverage in the expense ratio, particularly with the depreciation line in 2008 because of the new distribution center coming on line in Darlington.

Jeff Klinefelter - Piper Jaffray

Okay. One last question, if I might, and it may be the last time we get to ask George this question. A little bit more detail on some category trends, what you’re seeing in terms of firming of trends in the key—particularly men’s and women’s—apparel areas, availability of product, etc.

George A. Bellino

Availability is still there. Brands—I think the last time we talked Baby Phat and Rocawear brands had slowed down a little bit. They had a resurgence for the holiday and are doing very well for spring. Southpole, Enyce, Apple Bottoms also doing well. New brands coming on board: COOGI, we talked about before; Ed Hardy, Varian, ar rsurgence in the kids’ area of US Polo, which has not been that successful in the last couple of years but has come back.

It’s still a struggle with us in all areas from, I think part of the men’s branded area has been decreasing; you think it should plateau in an area of being somewhat stable in this first and second quarter of this year. Junior area, in the un-branded it’s fashion, colors—bright colors. Yellow is the hottest color for spring, followed by green. Plus knits have been very strong early, updated basics like Polos with side or vented plackets. The other thing is Big Screen Ts. Some of them are related to popular songs, like Independence is one that’s real hot right now. Another one is “When God Made Me He Was Just Showing Off”--that’s one of the hottest T-shirts we have right now. Jean business is still a little tough. We’re selling branded jeans very well. It’s unbranded fashion jeans that are not selling that well. Jewelry is the hottest category. We’re selling the men’s solid Polo, something that we’ve not sold well my career here and they’re very hot this year. Usually we sell striped Polos; this year the solids are selling. With plaid shorts. Plaid shorts are hot, but not as hot as they were last year, both in ladies’ and in men’s. Pretty strong in the kids’ area.

R. Edward Anderson

George, could you amplify on his question related to the men’s and women’s business in particular? I reported earlier in my comments that both men’s and women’s had negatives in the fourth quarter, on top of negatives of the previous fourth quarter. Could you just talk a little bit to Jeff about the health of our men’s and women’s?

George A. Bellino

The challenge with fashion in those areas--things have been selling, especially in the ladies’ junior area and the plus area are the branded. Unbranded part of the business, we’ve had a little struggle with personnel in the area, some of our buyers. But it’s not where real hot fashion lies. Men’s area—the thing that dragged us down in the fourth quarter in all the areas there was coats and sweaters. We had just a terrible year with the weather being warm. Some of the Northeast did well with coats and sweaters; we did not do well in those categories. In the branded coats—ladies. The rest of our businesses were really pretty tough in the ladies’ and men’s categories and that’s what hurt us. I think we’re going to see fashion business in both men’s and ladies’ get stronger this year.

Jeff Klinefelter - Piper Jaffray

Okay. Thank you.

Operator

Your next question is coming from the line of Evran Kopelman of JP Morgan. Please go ahead.

Evran Kopelman - JP Morgan

Thank you. Hi, guys. Couple of questions. The first one is on the fourth quarter, when you gave guidance on February 6 when you reported sales, I think you said $0.42-$0.46 and even excluding the tax rate, you delivered upside to that. Can you talk about what drove that upside?

Bruce D. Smith

Yes, Evran, there were several things. The two biggest things were the tax rate being much lower than expected. The other item that really stood out was the incentive compensation accrual, with the earnings being down as much as they were, the incentive compensation accrual, once we ran all the bonuses for stores, district managers, corporate distribution center, etc., the accrual need was much less than we had expected. So those were the big items. And there were a few other items that were a penny here or a penny there.

Evran Kopelman - JP Morgan

Okay. Great. And then the second question is on inventory. So first, can you talk about inventory plans, where you expect them for year end? And also how you’re buying inventory. Is it’s for your two to three comp plan or are you buying for possibly for lower costs and try to turn that faster?

R. Edward Anderson

Evran, if I understood, I think there were two or three questions there. One of them was—were you asking about the end of 2008 inventory plan?

Evran Kopelman - JP Morgan

Yes.

Bruce D. Smith

Evran, we’re looking at probably about $5 million more in inventory at the end of 2008 compared to the end of 2007.

Evran Kopelman - JP Morgan

Okay.

R. Edward Anderson

But it’s going to be flattish to down in comp stores for most of the year. That’s the target.

Evran Kopelman - JP Morgan

Okay, flattish to down.

R. Edward Anderson

You know, on a relatively small sales increase to increased inventory turnover during the year and to manage to—flattish to negative comp inventories through the year.

Evran Kopelman - JP Morgan

Okay, great. And then the final question, also on inventories, is on the content of it. Can you talk about the percent of markdown inventory now versus last year this time? And secondly you had talked about the pack-and-hold—where is it as a percent of inventories and some of these great buys you’ve had recently—what season is that for? I’m trying to figure out when we might be able to see some of the gross margins improvements because you’ve said the pack-and-holds have better margin.

R. Edward Anderson

Okay, I think I heard about three questions again, Evran. I’ll see if we can answer those three in the right order.

The first one had to do with content and the question was essentially what was the current content of our inventory, what’s the percentage of markdowns to the total. The percentage, as of last week that we just finished, the markdown percentage of total is around 13%-14% of the dollars. That compares to around 12% last year. So it’s fairly close. We believe the inventories are—this year versus last year—actually healthier because merchandise is marked down—I believe it is marked down even further than it was last year.

On pack-and-hold, we said at year end the pack-and-holds were up about $5 million. If you scroll forward to today, about where are we, Bruce?

Bruce D. Smith

We’re at about $15 million, at cost.

R. Edward Anderson

Compared to last year?

Bruce D. Smith

About $10 million.

R. Edward Anderson

It’s about the same place? As it was at year end.

Now your other question, Evran, was these pack-and-holds that Bruce was referring to that we bought recently, that are somewhat higher than last year. What season have they been bought for?

Evran Kopelman - JP Morgan

Right.

George A. Bellino

That’s mainly back-to-school and fall. It’ll start going out in June, out to stores, and the last one will probably go out as late as October. Most of it will go out August, September. It has had a better margin every year consistently, better than our regular goods. That’s why we continue to build it. Also, it’s what opportunity is out there. This year there was a lot of opportunity, with business being bad, and we took advantage of that.

Evran Kopelman - JP Morgan

Right. And just to clarify. So the $82 million at the year end, how much was the dollar amount of the pack-and-hold?

Bruce D. Smith

$15 million.

Evran Kopelman - JP Morgan

$15 million. Okay, great. Thank you.

Operator

Our next question is coming from the line of Shaun Smolarz with Sidoti & Company. Please go ahead.

Shaun Smolarz - Sidoti & Company, LLC

Hi, good afternoon everyone. My first question is what are your thoughts on the retail environment right now and the potential impact on the fiscal stimulus package on your customer and what gives you confidence of your comps to be positive this year.

R. Edward Anderson

I think I missed part of your question, Shaun, but I think you’re asking, just for our general feedback on the state of the economy as it affects our customer?

Shaun Smolarz - Sidoti & Company, LLC

Yes. And any impact on the fiscal stimulus package with those checks coming through at the beginning of May.

Bruce D. Smith

And then sort of juxtapose that with our expected 2%-3% comp.

Shaun Smolarz - Sidoti & Company, LLC

Right.

R. Edward Anderson

Well, our view of the economy today is that the economy for our customer is worse than it was a year ago. I think that situation has deteriorated because a couple of things have happened that were a little different than before. We had talked about our company had never really been able to see a direct correlation in high gas prices over the sub-prime lending issue, but a couple of other things have occurred.

The sharp spike in food prices, I think, is a big negative to our customer. While we talked about our customers’ spending on clothing being outsized, lower income customers also spend as much as 25% of their disposable income on food and so the very large inflation in food prices, we think those have a negative effect on our customers. And to some extent we believe the spike in unemployment will also be a negative to our customer.

But think the economy is somewhat worse for our customer today than it was last year, for sure. As we go through the year, into the Spring of the year--as we get into the late Spring, early Summer—when the governments economic stimulus package in the form of these rebates start coming out in, I guess in May, we believe that stimulus package should help Citi Trends and help Citi Trends’ customers because this package is intended to go to lower-income customers and the dollar amounts are targeted to the lower-income customer. Many of our customers will be the recipients of these tax rebates. And hopefully a lot of this money will get spent at Citi Trends.

It’s been some time since the last package like this was done—I believe it was in 2001—and so the data for--our company was a lot different in 2001 than it is today, geographically and size and other things, but back then that stimulus did occur—I believe it was in the early Summer—an the company did see a rebound in sales. Perhaps from this stimulus package and maybe some other reasons as well. So we think there was a net positive of some amount back then and we expect that this stimulus package will have a positive benefit of some amount on our company as we go into the late spring, early summer.

I think when you put all this together, when you look at the fact that the company came off of a year where comp sales were up just 1%--and it was pretty much that way pretty much all the way through 2007—and look at 2008, even though the economy is difficult, I think somewhere in the low single digit comps is about right for us.

Shaun Smolarz - Sidoti & Company, LLC

Okay, and my next question is for Bruce. Historically SG&A has risen a little more than 20% year-over-year on a dollar basis so I was a little surprised to see the SG&A was only up about 8% in this past fourth quarter. Can you just give us more color and how you were able to contain expenses in the fourth quarter like that?

Bruce D. Smith

Yes, Shaun. I mentioned earlier the incentive compensation. That was an accrual that we brought down quite a bit in the fourth quarter, based on the actual results. So that was one issue. In addition, during the fourth quarter we had some good results on insurance costs as well as professional fees. Remember last year we had the significant increase in audit and related costs because of Sarbanes Oxley they were in the first year of that. We had quite a bit of that fall in the fourth quarter last year—2006 I’m talking about. Those were the three big areas. If you look at our payroll and our occupancy expenses, they were actually up as a percent of sales, exclude compensation fees from payroll. And that’s typical when we have a negative comp store sales number like we did in the fourth.

Shaun Smolarz - Sidoti & Company, LLC

Okay. And just on the cash balance at the end of the fourth quarter, was that, say the $62 million, the $6.2 million in cash equivalent and then the $56 million short-term investment?

Bruce D. Smith

That’s right. It’s $62 million.

Shaun Smolarz - Sidoti & Company, LLC

Okay. And then the last question relates to the Chief Merchandising Officer. I think this question is for George. Can you elaborate on the timing of your decision to retire in light of a very challenging overall retail environment in the urban apparel market and the need to be more efficient internally?

George A. Bellino

Well, I think the timing—I’m like Bret Farb; I’m just tired. I’ve been doing this for a long time and we have to go to the next level, the company has great potential to grow and I don’t have the energy or passion right now to take it there, continue with it. We have a good merchandising team, a very good merchandising team, and we have a strong candidate for my replacement. I think that will make it easy for me to exit.

Shaun Smolarz - Sidoti & Company, LLC

And this last one is for Ed. During the process of when you’re looking for a new Chief Merchant, could you just maybe go into some generality in terms of what you’re looking for in a new person?

R. Edward Anderson

Okay. Obviously I should preface this by saying that finding a skilled merchant like George Bellino is a near impossible assignment. But what we’re trying to do here, we’re trying to make it easy for the head hunter. Basically we said what we want is someone with—first of all, the person has to be an apparel person. We want an apparel merchant that’s had a lot of skill in apparel retail—in department stores or specialty stores or off-price stores—with a preference toward off-price and specialty store background. And we want someone that, in addition to having a lot of apparel experience, the general management skills that you would expect. Someone that has good leadership skills, good communication skills, someone that’s going to be able to lead a team and hold the team accountable. It’s really that simple.

Shaun Smolarz - Sidoti & Company, LLC

All right, I appreciate your insights. And I thank you very much.

Operator

Your next question is coming from the line of Roxanne Meyer of Oppenheimer. Please go ahead.

Roxanne Meyer - Oppenheimer & Co. Inc.

Good afternoon. I just wanted to first follow up on the fashion, and George, you had mentioned that as we moved throughout the year we can expect to see some better fashion. I’m just wondering if you can elaborate, if you’re able to, on sort of what’s coming, what’s new, what we can expect to be the big drivers. And also, how do you see the unbranded part of the business impacting the business throughout the rest of the year? Is that an area that we can see improvement in or do you see the unbranded business continuing to be pressured?

George A. Bellino

I think there’s definitely improvement in the unbranded market. Part of it is we’ve changed buyers in that area, especially the plus size area, and they’re just getting their feet under them, now. Also, the top buyer in the junior area—I think this is going into her second year now—is really starting to get a handle on that part of the business. About-I guess it was about a year and a half ago, we moved a buyer out to the West Coast—that’s just beginning to start to pay off. And it was in the latter half--the first part of last year—not so much in the latter half—and we’ve expanded his responsibilities to cover plus size fashions, too. A lot of the fashion is coming out of the West Coast in the unbranded.

The market is on top of trends that turn trends out quickly, 4-6 weeks versus having to wait for foreign, overseas, the domestic market. What’s happening there? The knit business has gotten better and the woven business is starting to show some signs of life, in tops. If we get the jeans business back on track it would really happen. We see some life there—high-waisted jeans. Hopefully we can do some skirt business, which last year was nonexistent. We’re starting to see some life there. It’s a great opportunity for that part of the business. It’s work but I think it’s going to have an up side.

Roxanne Meyer - Oppenheimer & Co. Inc.

Okay, great. Are you able to share what percentage of the unbranded business is denim?

George A. Bellino

I don’t know that off hand. I couldn’t tell you.

Roxanne Meyer - Oppenheimer & Co. Inc.

Okay.

R. Edward Anderson

It’s way less than half.

George A. Bellino

I would say 20%.

R. Edward Anderson

Top or bottom is fairly even, and then the bottom stays—it’s about again, half--so it’s somewhere between 20% and 25% is probably is about the number, at the most.

Roxanne Meyer - Oppenheimer & Co. Inc.

Okay. And then in terms of your guidance, I mean thinking about how you SG&A was managed in the fourth quarter and the benefits from lower insurance costs, professional fees, and executive comp—I mean, how should we think about that in your 2008 guidance? Or should we expect that those will continue to be managed as tightly or should we begin to see increases in those items?

R. Edward Anderson

I think what you have to remember about the insurance and the professional fees is that in comparing 2007 to 2006 the reason we got benefit was because the amounts in 2006 in both of those areas were unusually high and so I think 2007 is probably a better gauge of what the number is going forward. So, we’re not really suggesting there was something that unusual in 2007, the unusual occurrence was back in 2006.

The incentive compensation is a different issue because in years like this where earnings drop the way they did, the bonus pool goes down substantially. And then if we get earnings going in the right direction next year it could go up substantially, also.

Roxanne Meyer - Oppenheimer & Co. Inc.

Okay. And then in terms of the tax rate assumption for 2008, is it going to be similar for the full year of 2007 or closer to the fourth quarter?

Bruce D. Smith

In our guidance we have included a 35% tax rate. That number is very difficult to predict for a lot of reasons. The two big items that we have are the tax-free interest income and the income tax credits that give us the big benefits and we have a hard time really predicting what’s going to happen with the tax-free interest income component of that. So at this point we are using 35% in our internal projections.

Roxanne Meyer - Oppenheimer & Co. Inc.

Okay. And then just last, what is your average new store size?

R. Edward Anderson

I guess this past year new stores averages I think 11.5--11,500 s.f. I think is right for 2007. And the stores that opened in the spring have averaged 11,400 s.f.

Roxanne Meyer - Oppenheimer & Co. Inc.

Okay, great. Thanks and best of luck.

Operator

Lyn Walther with Wachovia.

Lyn Walther - Wachovia Securities

Hi, guys. Thanks. One more on the incentive comp. Is it possible for Q4, can you give us the basis point impact from the accrual reversal?

Bruce D. Smith

I don’t want to drill it down into that level.

Lyn Walther - Wachovia Securities

Okay. And following up on another question, you mentioned Ed Hardy as one of the brands that you have. That’s a pretty expensive price point. Can you just give us a little more color on that? Is that in all stores, do you plan to add some other higher priced brands? I guess you’re not seeing any price resistance. Just a little more detail on that.

R. Edward Anderson

We don’t have it in all categories yet but we already have it; it’s selling very well. It’s a brand that—it’s not what you would be for our customers, but they’re buying it. We will expand it as we can expand it. It’s down in handbags now, and down in the junior area. We don’t have it in all of the men’s area yet. It’s what they’re demanding and we have to get it.

Lyn Walther - Wachovia Securities

Okay, great. And then I know you introduced your private brand, Rough Riders, back in the fall. How is that performing? Plans you have to add any other brands.

R. Edward Anderson

Right now we’re not planning to add any other brands. It’s performing in certain areas very well and in certain areas not so well. It depends on our execution and how we make it. It’s doing very well in the men’s, boys’ area, not so well in the kids’ area, not as well in the female side of the businesses. It’s more of a men’s brand, we’re doing well with it in shoes. In both the ladies’ and the men’s shoes it’s doing well. We do well in our best three areas but our first time out with it it depends on the execution of it. Actually we did very well in the plus size sportswear. We’re not licensing any more brands; we’re developing some more of our own label to come up with. We looked at Red Ape. Actually one of our buyers developed it with a vendor and he purchased it from him and they’re going to expand that as a brand for other areas.

Lyn Walther - Wachovia Securities

And what is your percentage of private label today?

R. Edward Anderson

Somewhere in the 15% area.

Lyn Walther - Wachovia Securities

Okay, great. And then just on the surveillance cameras that you have, I know things have been working well for you. How many stores do you have it in now? What are your plans for 2008?

R. Edward Anderson

We’ve increased the number of the 24/7 monitoring systems up to 16 stores and we’re adding another 14 stores through now, so we’ll have—I guess by the time we get through in another month or so—we’ll have about 30 Citi Trend stores on the 24/7 monitoring. And we’re going to stop at that point and evaluate these results before we continue. The results have been very, very good but we think that perhaps there could be a diminishing return on this investment so we want to make sure that we’re spending the money wisely. But we’re going to have 30 of our highest shrinkage stores on the system in another month or so.

Lyn Walther - Wachovia Securities

Okay, great. Good luck, guys.

Operator

Our next question is coming from the line of Rob Wilson - Tiburon Research. Please go ahead.

Rob Wilson - Tiburon Research

Yes, thank you. I’m looking at your balance sheet. Your balance sheet doesn’t exactly match the balance sheet that’s in your 10-K last year. I’m referring to last year’s numbers. Can you help me understand why cash changed and accounts payable changed?

Bruce D. Smith

Yes. There was a reclassification of prior year amounts to conform to the way we’re presenting the amounts this year. Basically, what it revolves around is in the past we had always taken our outstanding checks and reduced, or re-classed those, if you will, back into cash and increased our accounts payable because they had not cleared the bank yet. The way we’re accounting for that now is we are going ahead and treating those outstanding checks as being out of the cash and therefore having reduced the payables. So since we started doing that in 2007 we had to reclassify prior year amounts so that we have an apples and apples comparison.

Rob Wilson - Tiburon Research

That’s very helpful. And one other question. You guys seem to always indicate you’re happy with new store performance and the profitability thereof, but I’m looking at a business model that’s seen its operating margins materially decline. So can you help me reconcile those two things?

Bruce D. Smith

The business model—I guess you’re talking about the business model being in the company aggregate for 2007.

Rob Wilson - Tiburon Research

I’m looking at your operating margin, it’s declined from 7.9% in 2005 to 4.3% in 2007, yet you’re happy with new store performance. What am I missing? Why the material decline in operating margin if you’re happy with new store performance?

R. Edward Anderson

I guess the short answer to that question is when we talk about store operating performance we’re talking about sales made and generally the cash flow driven by these stores as we’ve opened them. And that has continued to be very good. The company’s operating results in 2007 were really across the board as we—it’s sort of a one issue problem with gross margins. We had inventory issues that would put us across the board in 2007; we had inventories that were too high so we had to take pretty aggressive markdowns in Q3 and Q4 to work our way through those inventories. And that was a company-wide issue. This was not a poor performance from any set of new stores or new store markets. This was really a company-wide issue and we think that issue is very largely behind us.

Rob Wilson - Tiburon Research

Okay, well thank you.

Operator

Your next question is coming from the line of Brian Rounchek with BLR Capital Partners. Please go on with your question.

Brian Rounchek - BLR Capital Partners

I apologize if I’m going to ask you to repeat a few things--my line was dropped. You guys had talked about current trends after giving your sales results from Q4, with January being up slightly. Can you repeat that?

R. Edward Anderson

I think what I said in the prepared comments earlier—I gave you sales results for the fourth quarter being negative 1.1and I said sales in November were up slightly. December was negative 5 and January was up slightly. Slightly means a positive of less than 1%. As we came into the first quarter of this year our sales have been very good for the first seven weeks of the quarter. That would have been through this past weekend—our sales were actually up about 10% in comp stores. But I also added quickly that this year’s results include Easter, which is a very important selling season for us and we haven’t gotten to last year’s Easter yet. So while we’re up nicely right now, I expect us to have pretty sharp negatives in the next week or two, which will put us, I think, close to being flat through February and March.

Brian Rounchek - BLR Capital Partners

Gotcha. And you talk, I think, about inventories being down about 10% per s.f. from your inventory being up about 3% per s.f. at the end of the fourth quarter. Is that the current inventory today?

Bruce D. Smith

Yes.

R. Edward Anderson

Just to restate that, what we said was inventories at the end of the fourth quarter, beginning of the first quarter, were up about 3% in comparable stores and the inventory number that I reported was the inventory this past weekend. In other words, quote inventories in the same place I quote sales, through the first seven weeks. After Easter this year, our inventories are down about 10% in comparable stores. Which they should be; we’re not past Easter and we targeted to be at about this point.

Brian Rounchek - BLR Capital Partners

Okay, great. You had also talked, I think, about reigning in the store square footage growth as a result of more trying to get the store base under control and I think some of that related to shrink. I thought you said that shrink was at 1.8% this year?

R. Edward Anderson

Yes, you’re essentially correct. The reason we’re pulling store growth back is to partly solidify our operations and reducing store manager turnover, continuing to do that as well as to continue to make sure this shrinkage number is still under control and coming down.

Brian Rounchek – BLR Capital Partners

The shrink was flat, year-over-year, though, right?

R. Edward Anderson

Pardon me?

Brian Rounchek – BLR Capital Partners

The shrink was pretty much the same as it was last year?

R. Edward Anderson

In the fourth quarter of 2007 the shrinkage was the same as last year.

Brian Rounchek – BLR Capital Partners

Up 1.8%?

R. Edward Anderson

Right.

Brian Rounchek – BLR Capital Partners

Okay, gotcha. And for the year do you know what it was?

Bruce D. Smith

It was up 27 basis points; I think the numbers were 1.7 to 1.9.

Brian Rounchek – BLR Capital Partners

I’ve got to assume you’re happy with that shrink rate, yes?

Bruce D. Smith

Well, not really.

Brian Rounchek – BLR Capital Partners

It can always be less but there’s always, obviously, a cost associated with that.

R. Edward Anderson

Sure, we’re glad to see that the rate of increase we think has stopped and that’s why I talked about the plateau. But you know, our target shrink number is lower than the number we have been incurring the last several quarters. We continue to want to drive it down further.

Brian Rounchek – BLR Capital Partners

What is your target, out of curiosity?

R. Edward Anderson

We would be happy at probably less than 1.5% of sales.

Brian Rounchek – BLR Capital Partners

Okay, gotcha. And you’re stating shrink on a cost basis?

R. Edward Anderson

Yes.

Brian Rounchek – BLR Capital Partners

Okay. You had said urban brands represent 51% or so. Is that correct?

Bruce D. Smith

Right.

R. Edward Anderson

For the fourth quarter, that’s correct.

Brian Rounchek – BLR Capital Partners

Versus 40% last year?

R. Edward Anderson

Right.

Brian Rounchek – BLR Capital Partners

And did that include men’s, women’s, kids’, home’s, etc.?

R. Edward Anderson

Yes. That’s every urban brand across all merchandising categories. Correct.

Brian Rounchek – BLR Capital Partners

Is it trended that way all year? Up slightly?

R. Edward Anderson

Fourth quarter during the year where urban brands, which was last year, were flat but all the other quarters the urban branded business as a percentage of our total business, has continued to increase.

Brian Rounchek – BLR Capital Partners

Is that a result, if I think I heard you correctly, that private brands were—you know, the unbranded merchandise in the store, which I think would include your private label merchandise along with other non-branded--has been slower and thus you’re moving inventory into areas that are obviously turning faster?

R. Edward Anderson

You’re exactly right. What is happening is while there wasn’t a real fashion trend driving the non-brand business—not just for Citi Trends but for other specialty retailers as well—we believe our customers have been using brands as a proxy for fashions so since we’re not selling as much non-branded we’ve pushed the branded business. And will continue to do that.

Brian Rounchek – BLR Capital Partners

If you looked at your margins of unbranded versus branded—I’m assuming the branded merchandise maintained margin, I’m talking now—are slightly lower, are less than the unbranded merchandise?

R. Edward Anderson

It is less than the non-branded merchandise but not consequently.

Bruce D. Smith

They’re very, very close.

Brian Rounchek – BLR Capital Partners

They are.

R. Edward Anderson

That’s why we’re indifferent to the branded versus non-branded; for us they’re very, very close.

Brian Rounchek – BLR Capital Partners

Is that because you’re combining in that merchandise margin the advantageous buys that you make and do your pack-and-holds? Is that the result of bringing the margins comparable?

R. Edward Anderson

That has something to do with it because one thing—because a high percentage of the pack-and-hold buys that we do make are in branded merchandise.

Brian Rounchek – BLR Capital Partners

I would assume almost 100% probably.

R. Edward Anderson

No, it’s not 100% but it’s a high percentage.

Brian Rounchek – BLR Capital Partners

Okay.

R. Edward Anderson

Because we do some very opportunistic buys of open price point merchandise as well.

Bruce D. Smith

Especially in the men’s side of the business.

R. Edward Anderson

A lot of our coats business are bought on a pack-and-hold basis.

Brian Rounchek – BLR Capital Partners

You had also talked about coats and sweaters being weak, George. Was that in men’s and juniors’?

George A. Bellino

Yes. The junior branded coats were strong. That was one of our—that and boys’. All the other coat areas—infants’, toddlers’, ladies’ unbranded, men’s branded and unbranded—they were very weak.

Brian Rounchek – BLR Capital Partners

Okay, got you. And one more, I’m sorry. Accessories. You had said for the fourth quarter. Where did accessories come in that?

Bruce D. Smith

It was negative 7% in the fourth quarter.

Brian Rounchek – BLR Capital Partners

Versus last years?

Bruce D. Smith

It was up somewhere in several digits.

Brian Rounchek – BLR Capital Partners

Okay.

R. Edward Anderson

It was a nice increase last year, a pretty big decrease this year, so a negative 7%.

Brian Rounchek – BLR Capital Partners

Negative 7% against positive 7%.

Bruce D. Smith

Right.

Brian Rounchek – BLR Capital Partners

Listen, I really appreciate your time and thanks for answering all the questions.

Operator

Your next question is coming from Patrick McKeever with MKM Partners. Please go ahead.

Patrick McKeever - MKM Partners LLC

Okay, thanks. Hi, Ed. Hi, Bruce. Going back to the question about the upside relative to your February 6 guidance, Bruce, you said it was the tax rate being lower than expected and incentive compensation, that reversing the accrual, and then insurance cost and professional fees coming down versus last year when they were high. Adjusting for those items would you have been more or less in line with your plan, that $.42-$.48—or guidance, I should say—would you have been near the top end of the range, or would you still beat it?

R. Edward Anderson

It would have been at the top end of the range, at least. Maybe slightly beat it.

Patrick McKeever - MKM Partners LLC

Okay. And then on traffic and tickets. Usually you talk about those things. Just wondering how those two items were in the fourth quarter and then more recently. Is the strength thus far in the first quarter of 2008, is that a function of average ticket being higher or sort of traffic being higher? Could you just give us a little color on those two items?

R. Edward Anderson

Yes. On the fourth quarter, and in most of the year of 2007, the traffic was the weakest area. Actually, the average number of items purchased was up but it was offset by less traffic and slightly lower average item price. I’m not real sure about the first quarter, honestly.

Patrick McKeever - MKM Partners LLC

In terms of the blend?

Bruce D. Smith

We don’t have those stats yet.

Patrick McKeever - MKM Partners LLC

Okay. And then in the—it may be too hard to ascertain, but in the fourth quarter how much of your sales were driven by markdowns? Can you provide any color on that, do you know what I mean? Now that you’re so much cleaner from an inventory standpoint, I guess my question is that your customers in the fourth quarter must have benefited from some pretty hefty markdowns and maybe that helped to drive the average number of items purchased up and all. But is that a risk now that the markdowns were so aggressive in the fourth quarter that your customer might be conditioned to expect that going into this year?

R. Edward Anderson

That’s a really interesting question. You know, we don’t have the statistics in front of us that suggest how much of our business in the fourth quarter was selling the clearance merchandise versus selling regular price compared to the prior year. My guess is it was probably somewhat higher because we had more clearance merchandise in the fourth quarter and we were very aggressive.

But remember, Patrick, we don’t do commercial markdowns, we just mark it down permanently and send those to a clearance rack. We don’t do 25% and 50% off pricing and so we’re not doing that. But we clearly had more clearance merchandise.

Our point of view is that it’s better to have fresh, new merchandise for sale than to have a lot of clearance merchandise. And so we think while we have some customers that are clearly clearance buyers, that the company’s health over time—sales over time—will actually be higher with a higher proportion of regular price merchandise. So we believe that’s going to be favorable for us as we go through the first quarter and through 2008. So your point about this idea of value-conscious customers having an appetite for clearance is a good one.

Patrick McKeever - MKM Partners LLC

Okay. And then last one. Cato is opening up this larger urban apparel oriented store, it’s fashion metro store. And they don’t have too many right now—I think it’s six. But they’re planning on opening up 30 in 2008. Do you have any of those in your markets? Have you seen them yet?

R. Edward Anderson

Yes we have. We’ve seen three or four of them in our markets, yes.

Patrick McKeever - MKM Partners LLC

Any comment? When they open up does that hurt your business in those markets or is than an issue? Competitively speaking.

Bruce D. Smith

You now, we have--our point of view is that competition is not good. And so any time a competitor opens up that’s going after your customer or attempting to sell them some of their merchandise, generally has a negative impact on your business. We have not yet seen a measurable impact in those markets where we’ve had the competitor you referred to open up. And as a practice we just don’t like to talk too much our competitor’s initiatives.

Patrick McKeever - MKM Partners LLC

Sure. Understood. Okay. Thanks, Bruce.

Operator

(Operator Instructions) Our next question is coming from the line of Quentin Mannard. Please go ahead.

Quentin Mannard – Morehead Capital

Hey guys, how are you doing today? I think most of my questions have been answered. I just have a few follow ups. You had talked about hoping to control shrink through improving manager turnover in stores and indicated that that was on track. Do you have a number for where management turn is now?

R. Edward Anderson

Well, Quentin, I didn’t say it was on track. I said it had improved nicely. I’ll just give you the numbers. The numbers for 2005 and 2006, store manager turnover was over 40% in each of those years. We did pull down for 2007, I think it’s between 30% and 31%. So we have made some nice progress but it needs to be under 30% and we continue to push that.

Quentin Mannard – Morehead Capital

One other quick question. I don’t know if you will know this off the top of your head but can you break out what percentage of your sales are credit card sales?

Bruce D. Smith

Yes. About 25% of our sales are credit card sales. The other 75% are obviously cash and check, but about 25% are credit card—or plastic.

Quentin Mannard – Morehead Capital

Okay. But that would include a debit, though?

Bruce D. Smith

We believe that at least half of those 25% plastic transactions are debits.

Quentin Mannard – Morehead Capital

Gotcha. And then as far as lay-a-way, is that a meaningful percentage at all for you?

Bruce D. Smith

Yes, it is. It’s between 8% and 10% of our business.

Quentin Mannard – Morehead Capital

One last question. In looking at a net income margin for you guys and thinking about the growth of the business, the growth of square footage, you know the fantastic results you had in 2006—I think you were over 5% of the net level—can you help me understand kind of what the target is? Was 2006 an aberration and we should just never expect that again or is that where you feel you can get—and also kind of a time line on what you think the right amount of time to kind of make progress to whatever that goal is should be.

Bruce D. Smith

I’ll be honest with you, Quentin. We don’t look at the net income percent near as much as we do the operating income percent. Because interest income and the income tax rate are out of the control of the operations group here but the operating income rate did get as high as 7.9% back in 2006 and that was year that we did have the extra week and everything was running on all cylinders. But we would hope that over some period of time we would get back to that. I mentioned earlier that we certainly think we have a potential to make significant strides in getting back to our gross margin historical levels, up in the 38% range. Even if we don’t get all of it this year we certainly hope to within two years.

And then the key on the expense rate, which is the other major component of the operating profit percent, is to get comp store sales going in the right direction and getting them in excess of that three percent range because that’s where we start to get leverage once we get over that.

Quentin Mannard – Morehead Capital

I got you. As far as thinking about—is this something you think we could be getting, you know, above 6%, or heading toward that 7% level, through 2008, or are we looking at into 2009? Any feel for that?

Bruce D. Smith

Well, you know we gave you our guidance for 2008 and I think that’s pretty much a level we would want to get to at this point.

Quentin Mannard – Morehead Capital

Thank you very much, guys. I appreciate it.

Operator

Your next question comes from the line of Mark Cooper with Welch Capital Management. Please go ahead.

Mark Cooper – Welch Capital Management

Thank you. Did you get the cash flow from operations and CAPEX number for the year?

Bruce D. Smith

The CAPEX number for the year was $30 million and the cash provided by operating activities was $16 million.

Mark Cooper – Welch Capital Management

Thank you.

Operator

And we have a follow-up from Shaun Smolarz. Please go ahead.

Shaun Smolarz – Sidoti & Company, LLC

Just a quick follow up. I wanted to know if—it seems like you had a relatively strong Easter season. I wanted to know if that gives you any more confidence in the state of your consumer and if that Easter was overall better than you expected?

R. Edward Anderson

I’m glad you asked that question because Easter week is a very important week for us and it is kind of a barometer of how things work in the spring. The week we just finished, that was in that number I gave you earlier, cumulatively 10% up, which included that Easter week—that week this year I think was about a $12.5 million week.

On a comparable stores basis, compared to last year, if I take this Easter week and compare it to last year’s Easter week, I think our sales were down about 0.7%, week-for week. In other words, Easter week this year was two weeks earlier than last year’s Easter week but this year’s Easter week was down about 0.7% so we were really disappointed by that week. We thought we had a big opportunity with this year’s Easter because last year’s Easter wasn’t great. Last year’s Easter week we were very disappointed in. We had a very cold Easter week last year and were disappointed. We did temper our expectations for this year’s Easter because it’s two weeks earlier. So we didn’t think this year’s Easter was that great, really.

Shaun Smolarz – Sidoti & Company, LLC

Okay. I appreciate that insight.

Operator

Thank you. There appear to be no further questions. Mr. Anderson, please continue with any closing comments.

R. Edward Anderson

We appreciate all of your questions and thank you for joining the phone call.

Operator

Thank you ladies and gentlemen. This does conclude the Citi Trends conference call. You may now disconnect. Have a very pleasant rest of your day.

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