Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Citi Trends (NASDAQ:CTRN)

Q1 2008 Earnings Call

May 21, 2008 5:00 pm ET

Executives

Edward Anderson - Chairman and Chief Executive Officer

Beth Feher - Chief Merchandising Officer

Bruce D. Smith - Chief Financial Officer

Analysts

Jeffrey Klinefelter - Piper Jaffray

Lyn Walther - Wachovia

Evran Kopelman - JP Morgan

Patrick McKeever - MKM Partners

Quentin Mannard - Morehead Capital

Operator

Good day, ladies and gentlemen 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 Smith

Thanks Michael. Good afternoon everybody and thank you for joining us today. Also on the call are Ed Anderson, Chairman and Chief Executive Officer, and Beth Feher, our new Chief Merchandising Officer.

Our first quarter earnings release was sent out at 4:00 pm Eastern Time 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 the 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 and I will provide you with some details related to the first quarter results and guidance for 2008. After which Ed, Beth and I will address any questions you may have.

Now I will turn the call over to Ed.

Edward Anderson

Thank you Bruce, and good afternoon everyone. First I want to make a few comments about our new Chief Merchant Beth Feher, Beth joined Citi Trends on April 2 about six weeks ago. She replaces George Bellino who had previously announced his retirement. I should add here how much I appreciate George Bellino’s contributions to our company’s success. Back to Beth we’re happy to have her on our team. While she has been here only a short-term, she is already making a positive impact.

She has been an apparel merchant her entire courier and brings a track record of outstanding success to our Company. We are confident she will lead our Merchandising team to a great success. Now about first quarter sales, total sales in the 13 week’s ended May 3rd, 2008 increased to 13.5% to $121 million compared with a $106.6 million in last year’s first quarter.

Comparable store sales increased 0.3% in the first quarter. Comparable store sales by month for the first quarter were as follows, up 10% in February, down 10% in March and up 4.5% in April. Our slightly positive sales in the first quarter were a little less than we had expected, after a very strong start to the quarter in February sales were poor in March. Colder weather in March and the earlier Easter holiday both contributed to the disappointing March sales.

Our business did improve in April and we ended the quarter on a fairly positive note. Earnings per share results for the quarter came in at $0.36 per share compared to the last year’s $0.40. Given the soft sales environment especially around the very important Easter holiday, we are pleased overall with the results for the first quarter.

We have made very good progress in inventories management. We delivered positive comparable store sales in April with a half single digit decline in inventory. We fell good about the quantity and the quality of our inventory, we should be able to deliver positive comp sales with a declining comp inventories in quarters two and three of 2008. Total company inventory as end of the first quarter was 2.5% less than last year and approximately 13% last in comparable stores.

Inventories came in slightly less than planned, but at levels with which we are comfortable. Inventory shrinkage in the first quarter was 1.7% of sales flat with last year's first quarter. We believe that inventory shrinkage -- we expect to flat towards the fourth quarter still manage -- the turnover has continued to improve and the results of the 24/7 camera monitoring had been good. Preliminary results of inventories taken in the second quarter suggest improvement over the last year.

Expansion of our Darlington distribution center is complete. We are now adding some additional equipment including [Inaudible] and material handling equipment and a new quick to like system for picking, which will improve productivity. Also we are in the final testing stages of a new warehouse management system to improve productivity and inventory management. We expect to go loud with the WMS in the early fall. The cost of the expansion as well as the equipment and the WMS were totaled about $15 million somewhat less than we had originally estimated.

In the first quarter of 2008, we've opened 12 new stores and expanded four existing stores. The markets for the spring have included Flint, Michigan, Fort Wayne and South Bend, Indiana and Lawton, Oklahoma. We have also added new stores in existing markets in Baton Rouge, Louisiana; Tampa, Florida and San Antonio, Texas. Our results of these stores are preliminary; these stores seemed to have opened very well. I have Bruce to go into more detail on the financial results of the first quarter and earnings guidance for the year.

Bruce Smith

The Comparable store sales increase of 0.3% in the first quarter was largely driven by the children side of the business. By category, children’s sales were up 5% versus up 6% in last years first quarter. Women’s division was even with last year versus being down 3% in 2007s first quarter. Home was also flat this year compared with the plus 6% last year, men’s was down 3% versus flat last year and accessories were down 4% versus up 2% in 2007.

Sales of nationally recognized urban brands performed in line with our other merchandise and accounted for 46% of our sales, same as last year’s first quarter. Gross margin for the quarter was 38.6% compared to last year’s 39.1%. 50 basis points decline was a result of higher merchandise mark downs caused by the continued sluggish sales environment.

We once again saw moderation and inventory shrinkage. At 1.7% of sales, shrinkage was even with last year’s first quarter and 20 basis points below last year’s full year rate. SG&A expenses were 30% of sales in the first quarter of versus 28.7% last year. Most of the increase in expenses as a percent of sales was due to the deleverage caused by the modest increase in comp store sales of 0.3%; it was well below the normal rate of inflation and expenses.

Payroll expense was up 60 basis point as a percent of sales while occupancy expenses were 40 basis points higher. Depreciation expenses for the quarter increased $900,000 and rose from 2.6% of sales in the first quarter last year to 3.1% this year as a result of capital expenditures incurred for new relocated and expanded stores. The effect of income tax rate use in the first quarter was 32% compared to 35% in last year’s first quarter, which provided a benefit to the quarter of almost $0.02 per share.

Last year, the 35% estimated rate used in the first quarter proved to be too high as the full year rate ended up being 31%. This year, we believe that the full year rate will be approximate 32%. However, the biggest unknown at this point is whether we will be able to liquidate our investment positions in auction rate securities which do provide tax free interest income. Without that tax benefit, our effective rate would push closer to 35% if we did not reinvest in tax free instruments. Net income for the quarter was $5.2 million this year compared to $5.7 million in 2007s first quarter.

Now when looking at the balance sheet, total inventories were actually down 2.5% from the end of 2007 first quarter despite an increase in store selling square footage of 16.5%. Inventories in comparable stores were down 13%, as we continue to bring our inventory levels more inline with where they think -- we think they need to be. You may remember that at the end of last year’s first quarter our comparable store inventories were up 13% over the same time in 2006.

The other significant item of note on the balance sheet is the reclassification of our auction rates securities to non-current. This market which we discussed in detail on the year end earnings call is still not liquidated and until we see either that liquidity is returning to the auction process, the secondary market emerges or the issuers begin the call the notes; we feel like it is appropriate to classify them as non-current.

In addition to the reclassification, we performed a fair value analysis of the securities, due to the lack of liquidity. This analysis indicated that we should book a temporary impairment charge of $2.3 million or $1.4 million after-tax. This charge does not run through the P&L, but is instead of reduction of stockholders equity.

Even without current liquidity in the auction rates securities market, we believe we have adequate liquidity to fund our operations. In addition to cash on hand, we have $35 million credit facility which we have not yet had to utilize.

As for 2008 guidance, we expect earnings in the range of $1.10 to $1.15 per diluted share. This guidance assumes an anticipated comparable store sales increase of 2% to 3%, an increase in selling square footage of 15% and an effective tax rate of 32%.

Now if the operator will come back on; we are ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question is from the line of Jeff Klinefelter with Piper Jaffray. Please go ahead.

Jeffrey Klinefelter - Piper Jaffray

Yes, just a couple questions for you. First of all at top of mind for everyone right now is the rebate checks and their potential impact on business and well difficult for anyone to tell in their sales results so far; could you discuss if you are picking up on any trends yet that would point to the rebate checks having an effect; anything you are doing to capitalize from a marketing to drive store traffic in from a local marketing perspective and all to capture those as well?

Edward Anderson

Okay. Thanks for the question Jeff. Regarding this issue of the tax incentives which I believe began being sent out to people about 2 to 2.5 weeks ago. We have begun to hear from our store managers, district managers, regional that people are beginning to get the tax checks, not in huge amounts, but in some amounts, but we have yet to be able to see any real change in our business that we could suggest was a result of the tax checks to this point. I’ll point out to you that our sales were 4.5% through the month of April and for the first couple of weeks into May, we’re running 4% up. We have to see any real impact from the checks. Even though, we expect it to be some positive impact, it’s really hard to have any determination of what that impact might be. As far as doing a special marketing to drive customers into our stores as you know we spend very little on advertising and really allow our merchandizing to do the marketing for us and so we have really not done any special marketing for this event.

Jeffrey Klinefelter - Piper Jaffray

Okay. A couple of other questions; one on expenses and payroll cost at your stores; are you seeing any sort of pressure there? Are you expecting any pressure or anything to accelerate as you go through the balance of the year?

Bruce Smith

Well, nothing of any great substance during the first quarter in addition to just a lack of leverage from flat comp store sales. When we look back at the components for the quarter, of the 60 basis points, 10 basis points effort was direct store payroll. Another 20 basis points was in what we call the store operations group, which includes district managers, regional managers and a few people at corporate and the 20 basis points there was more related to the fact that we did reduce the span of control that our district managers have. We reduced the number of stores that they supervise and so that caused a little bit to of the de-leverage that we had and then the rest of it was -- the other 30 basis points or so was related primarily to the benefits including a higher bonus accrual in the first quarter of this year than last year, because last year’s was unusually low -- significantly missed a budget at that point in time.

Edward Anderson

Back to your question Jeff, we really don’t see that the numbers running away from us in stores as we proceed and a 10 basis de-leverage in stores, on 0.3 sales is really pretty good we think.

Jeffrey Klinefelter - Piper Jaffray

Yes, would agree. Maybe lastly speaking to some more of the merchandize or brand trends opportunities, would you speak to that little bit at in terms of -- are you running behind an inventory? I’d imagine there is brands that are trending pretty well. Do you have pockets of inventory deficiency that you’re chasing after at this point given the strength that you did see Q1 and then I don’t know if Liz wants to jump in here on the first call and comment at all on from an outside perspective and opportunity she sees for the company going forward?

Edward Anderson

Well, I will speak generally Jeff and then -- Beth has been -- even though she has been with the company just six weeks she has been in market twice with us -- with our buyers up in New York and so she does have some same of what’s going on in the marketplace particularly as a ways to close our buyers, particular branded close to our buyers. Generally speaking, we have been able to get the merchandise we want at the time we wanted. Beth you want to talk about any particular brands or opportunities you are seeing.

Beth Feher

We are finding just about all the goods that we need out there. We don’t see a shortness of merchandise at this point. Our brands are pretty much tracking at the levels that they were at last year. We don’t see that going up or down right now, we like the level that it’s add. We are monitoring it by zone, but right now we think we are in a pretty good brand position and we are in a pretty good inventory level with the branded product in our stores.

Jeffrey Klinefelter - Piper Jaffray

Okay, and Beth just one other thing from your perspective with your past experience, with other retailers any quick thoughts on opportunities, key opportunities you see in merchandise categories or markets?

Beth Feher

No, I think it’s a little early to mention that. I don’t see any major changes. As far what I have seen I like and I’m sure we will have some incremental changes down the road, but right now reviewing the buying staff, the product assortments. I think it’s a really strong formula, but I’m sure as in most retailing arenas. We will have some change down the road.

Operator

Our next question is from the line of Lyn Walther with Wachovia. Please go ahead.

Lyn Walther - Wachovia

Hi, thanks. Just following on that last question, Ed you mentioned that Beth was already making a positive impact. Can you maybe just talk about what she has impacted so far and then maybe looking out when we could really see more of her influence?

Edward Anderson

Well, hi Lyn. Again thanks for the question. What I really meant by the positive impact is she has come in here in a short-time, done a lot of work and spend a lot of time getting to know the team and getting very involved with the team and getting very involved in and inventory management which as you know has been a challenge for us in the past and I’m confident she is going to pick up this range very soon and do a very good job with inventory management in particular. That’s about what I was talking about. She and I have spend lot time together, we have traveled stores together getting -- and looked at towards the trends and looking at some opportunities down the road. She has said already it's a little early to talk about changes at this point, at least consequential ones.

Lyn Walther - Wachovia

Okay and can you maybe talk about the unbranded part of the business. I know that’s been an area you have been struggling a little bit more with; do you see any opportunities there and is anything really changed this past quarter?

Edward Anderson

I reiterate that. Our branded business has been difficult for us for sometime, particularly as we have been trying to find the fashion direction, but I ask Beth to just comment to you briefly about some of the things that are working and unbranded at this point and what kinds of fashions maybe taking hold for us as we head in the fall.

Beth Feher

We are seeing from the fashion side of it, ads are selling extremely well. The Polo classification is also doing well in all zones of business from kids to ladies to men and we are also seeing trends towards any kind of foil printing or any kind of metallic happening in either gold or silver. We are also noticing that there is a trend towards woven shirts that we think probably is starting now and will continuing into the fall and early into spring. Within denim there is actually a lot of excitement going on. That new high-waisted denim is perfect for our consumer, we are also selling skinny legs within denim and we are selling new trouser bodies. The whole color theme though this year that’s out in the bright colors are the citrus colors of the yellows, the fuchsias and the Green, are so right on for our customer and we are seeing good results whenever we are carrying the commodity items in those bright colors. Outside of that there is a few things from a more edgy point of view that are starting to sell, like leggings and some of the military looks. We sell pretty positive overall about the fashion side of the business the unbranded piece

Lyn Walther - Wachovia

Okay thanks, that’s helpful and then just one for Bruce; SG&A dollar growth, should we assume it will be in a similar level as Q1 throughout the rest of the 2008?

Bruce Smith

Firstly Len, the only thing I will point out is the depreciation on the loans and distribution center will start in the second quarter and on an annualized basis that’s going to be in the neighborhood of $1.2 million or $1.3 million; that is one incremental piece. Other than that, we don’t -- we typically don’t give a lot of the way forecast just to the end of the points of the P&L.

Operator

Thank you our next question will come from Patrick McKeever with MKM Partners. Please go ahead. Patrick McKeever your line is open, are you with us?

Patrick McKeever - MKM Partners

I am. Thank you very much. Hi, everyone. Just on the second quarter same store sales comparison, the one we should be thinking about is the fiscal number, the 9.4% as opposed to the calendar comp that was 3.4% last year.

Bruce Smith

No, you should be looking at the calendar cost.

Patrick McKeever - MKM Partners

Okay. So, when you say that comps should be positive even with much lower inventories per store through the second and third quarters, I am just thinking of that 3.4% that you did last year and given the current trend which is kind of in 4% to 5%, 4% area.

Edward Anderson

Well let me be more specific about that Patrick. I will say in two different things; one, I would say I think the Company should be able to deliver positive inventories with positive sales with negative inventories, because we wrote inventory last year, and we ought to be able to deliver positive comp sales with mid-single digit negative inventories at least and obviously as Patrick as you know there are no guarantees about sales, but we are looking for low single digits sales in the second quarter and prospectively and we have -- to which doesn’t make the quarter but sure we have 4% or so with two weeks into May.

Patrick McKeever - MKM Partners

Yes and that’s kind of what I am thinking. I am just trying to get a handle, a better handle. I know the business can be volatile month-to-month because of the weather and other factors especially calendar shift -- holiday shifts like Easter, but the -- if you think back to the second quarter of 2007 at that point in time you had stopped giving out monthly comps. What -- maybe you could give us some flavor on where the different months of the second quarter 2007 were, so maybe even just switch months for the harder months from a comparison standpoint this year and which are the easier months, that sort of thing?

Bruce Smith

Sure, I'll do that Patrick. I will give you some fairly round numbers but that’s obviously very close on a by month basis comps for last year’s second quarter. I would -- with the total quarter being up around 3% or so, the best months of the quarter was last year’s May about seven and June was about six, but July was a negative five. You may remember that we had a lot of later school openings last year that pushed out into August and so we had some very disappointing sales at the very end of July and we had some very nice sales at the very beginning of August. That’s roughly it.

Patrick McKeever - MKM Partners

Okay so you think the business is starting to from a -- certainly from a top line standpoint, from a sales standpoint, underlying demand standpoint starting to give firm up your even though the results is Doom & Gloom on the economy and gas prices and sub-prime so all that stuff.

Bruce Smith

Yeah, I -- but I am not well optimistic Patrick. Firming up is one thing -- firming up, with slight positives is one thing but we have not become widely optimistic clearly as we've going through the month of April and now through the first couple weeks of May with 2% to 3% or 4% up, that’s nicely positive but then solid, but it’s not the charge to positive. So I guess we will wait and see.

Patrick McKeever - MKM Partners

Okay and then just circling back to the first question that asked on the stimulus program, you saw such a nice lift when some of the federal released dollars to sales slowed into the Gulf coast states and talk to them about how your customer, your core customer tends to spend incremental -- those kinds of incremental funds and apparels to high priority and so forth. I’m just wondering just maybe on that same logic why there wouldn’t be a bigger benefit to sales say in the months of June and July when the bulk of those stimulus dollars are distributed?

Edward Anderson

Well, as we have said before we are starting the here noise about the checks coming out, but again we haven’t been able to see any explanation to this point, but I think your right as far as the timing probably goes, because remember in the post Katrina hurricane time down in those 50 stores of sale trends which were affected, there are two thing is going on, well three things going on, there is a lot of money being pushed in that area, but probably donations, huge amounts of money being donated to folks down there as well as a lot of government money being spent down there and so there is a lot of money going into those folks hands, but they also had a need. People had to replace households or clothing and so they had money with the clear need, here there is going to be $110 billion I guess to pass out to folks over the next eight weeks or 10 weeks, but there is not the same kind of a demand drivers, so I am not sure what the money is being spent on.

Operator

Our next question is from the line of Evran Kopelman with JP Morgan. Please go ahead.

Evran Kopelman - JP Morgan

My questions on -- first question is just back to disclosures last year; do you know if there is any changes this year or it should be more comparable, the schedule for last year so we shouldn’t expect any shift?

Edward Anderson

Evran, we don’t have all of the debt in yet. We were actually doing -- we were surveying our stores now [Inaudible] right this minute. What we have heard anecdotally is that there are going to be major openings again this year but not nearly to the magnitude of last year, but I think we are all going to see some pressure in July again but not nearly to the magnitude of last year.

Evran Kopelman - JP Morgan

Okay, that helps and then on the merchandise margin, looking at the second quarter of last year, it’s tough because of the both the back-to-school, but also the calendar shift, but I think I remember -- if I remember correctly you said markdowns were higher last year, they were also higher a year before. I guess with inventories in great shape today would you expect lower markdowns this year in the second quarter?

Edward Anderson

Evran last year the markdowns were comparable as a percent of sales through 2006. What really happened, that pressured margins in the second quarter was the shrinkage was higher, it was higher by about 80 basis points than in the second quarter of the previous year and that was virtually all of the fluctuation in gross margin year-over-year, as it relates to shrinkage we hope that maybe we’ll pick something up in the second quarter, but I don’t really think it has anything to do with markdowns.

Evran Kopelman - JP Morgan

Okay and finally on the -- this DNA, what’s your expectation for the year?

Bruce Smith

$16 million

Operator

(Operator Instructions) Quentin Mannard with Morehead Capital please go ahead with your question.

Quentin Mannard - Morehead Capital

Hey, guys congratulations. Just a quick questions for Beth; as we are moving out at the branded merchandise, are you seeing any of the inflation that we get announced coming from the production side?

Beth Feher

No, not that we are hearing and we have been in -- I have been in the market two weeks out of the last six, so at this point no, I am not.

Operator

All right thank you. There are no further questions at this time. Mr. Anderson, please continue with any closing comments.

Edward Anderson

Okay. Thank you all for joining the call -- phone call, we’ll see you next time.

Operator

Thank you and ladies and gentlemen this does conclude The Citi Trends conference call, you may now disconnect. Thank you for this using ACC conferencing. Have a very pleasant rest of your day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Citi Trends Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts