Citi Trends, Inc. (CTRN) Q1 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends First Quarter 2014 Conference Call. [Operator Instructions] As a reminder, this conference is being recorded, Wednesday, May 21, 2014. I would now like to turn the conference over to Tripp Sullivan with Corporate Communications. Please go ahead sir.

Thank you. Our earnings release was sent out this morning at 6:45 a.m. Eastern. If you have not received a copy of the release, it's available on the 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. 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 on them. We refer you to the company's most recent report on Form 10-K filed with the Securities and Exchange Commission for a more detailed discussion of the factors that can cause actual results to differ materially from those described in the forward-looking statements. I'd now like to turn the call over to Bruce Smith, Chief Financial Officer. Bruce, please go ahead.

Thanks, Tripp. Good morning, everybody, and thank you for joining us today. Also on the call are Ed Anderson, Chairman and CEO; and Jason Mazzola, Executive Vice President and Chief Merchandising Officer. First, I will provide you with details related to the quarterly results. And then Ed will discuss further the results and our business outlook. After which, we will address any questions you might have. Total sales in the first quarter increased 3% to $188 million, consisting of a 4% improvement in comparable store sales, net of a slight decline due to having fewer stores this year than in last year's first quarter. Comp store sales reflected an increase of almost 6% in the number of customer transactions and a 1% increase in the average number of items per transaction, partially offset by a decrease of more than 2% in the average unit sale. By merchandise category, first quarter sales in comparable stores were as follows: Accessories were up 22%, on top of a 14% increase in last year's first quarter; Home division was also up 22% this year and was up 20% last year; Children's sales were up 1% this year after being down 3% in last year's first quarter; Men's sales were down 2% and down 7% last year; and the ladies division was down 7% this year after being down 16% in last year's first quarter. Sales of nationally recognized brands represented 26% of total sales in the quarter, compared with 38% last year. Comparable store sales by month in the first quarter were up 5% in February, down 3% in March and up 13% in April. The shift in the timing of Easter resulted in much of the variability in sales between March and April. As we've entered May, comp store sales were up 3% in the first 2 weeks. Cost of goods sold, as a percentage of sales, improve 200 basis points in the first quarter due to a much better sell-through of merchandise together with strong inventory control measures taken by our merchandising group. SG&A expenses increased $2.1 million or 4%, and increased slightly as a percentage of sales to 28.7% from 28.5% last year. In addition to normal inflationary effects on expenses such as payroll, rent and utilities, we did experience some pressure on distribution center and store expense in relation to last year's first quarter due to a significant increase in units handled by our DCs and stores. Units received were 26% higher than last year, due primarily to owning less inventory at the beginning of the quarter. Depreciation expense declined by $400,000 due to our pullback in new store growth. First quarter net income in 2014 was $9.1 million or $0.61 per share, compared to $6.2 million or $0.42 per share last year. Our balance sheet position remains strong. Cash, together with short-term and long-term investment securities, totaled $108 million at quarter end. Inventory changes were consistent with sales results, and we continue to have no debt. Now, I'll turn the call over to Ed.

Thank you, Bruce, and good morning, everyone. The first quarter results reflect the progress we are making in a turnaround of Citi Trends. There were a lot of positives in the first quarter. Comp store sales increase was the best we've had in 4 years, and it came in the largest sales volume quarter of the year. Our best sales performance again was the Accessories business, primarily footwear with a 22% increase on top of last year's 14% increase. The Accessories business accounted for 29% of our total sales in Q1 compared to 25% last year. As we have discussed in previous calls, we have consciously increased footwear, as well as Men's, Ladies and Children's accessories. Again, this year, we have converted more selling floor space to footwear to accommodate the inventory needed to support the sales growth. We expect 2014 to be another good year for footwear and the other accessory businesses. The Home business, while still only 3% of our total business, delivered a 22% sales increase on top of a 20% increase last year. We have tested a lot of new categories in the Home area and see the potential for continued growth here, as well. The Apparel businesses did not perform as well. However, the Children's division did deliver a 1% increase in the quarter. The Ladies business, which delivered a 7% decrease, continues to be our biggest challenge. Again, as previously discussed in conference calls, the traditional urban branded business has just about disappeared in the ladies business. The urban brands as percentage of sales in ladies were 6% this year versus 28% last year. Our unbranded fashion business is delivering sales increases, but not yet enough to offset the branded decreases. Urban brands were significantly less in the last 3 quarters of 2013, making the comparisons in ladies much easier for the remainder of 2014. Cost of goods sold improved 200 basis points in the quarter. The primary driver here was lower markdowns from better inventory management. We ended the quarter with inventories up 3.9%, which was essentially our target for the end of Q1. We believed that we were a little light at the end of last year's Q1. We did see some deleverage in SG&A expenses in the quarter compared to last year, as Bruce previously explained. Our balance sheet and cash position remains strong. 2014 will be another conservative year for store growth. We expect to open 5 to 8 new stores, expand or relocate 5 to 10 stores and remodel about 25 stores. We are generally pleased with the first quarter results. We believe our strategies are working and will deliver a successful 2014. Now, operator, we'll take any questions.

[Operator Instructions] Our first question comes from the line of Anna Andreeva with Oppenheimer and Company.

This is actually Steven Zaccone on for Anna. Congrats on the good results there. Very impressive on the gross margin line. Do you guys think the momentum can carry you through the tougher comparisons through the rest of the year? Should we be expecting some gross margin expansion in the second quarter and then that can carry through in the back half?

When we look at gross margin, it's probably best to try to frame it in the context of where we've come from. As you probably remember historically, prior to 2011, our gross margin was typically around 38%, and then it fell off down into the 35% range. We're actually below 35% for 2011 and 2012 before recovering just to about 36.5% last year. We expect that there's probably still some upside to the gross margin rate. You saw the 200-basis-point improvement in the first quarter. As we work our way back to that 38% historical rate, it may be a stretch to think that we'll get all the way back this year, but we'll probably get pretty close to that 38% rate. The one caveat is always is that gross margin is somewhat dependent on our comp store sales, because those have an impact on the amount of markdowns that we have to take.

Okay, great. That's helpful. And then I guess, shifting to comps like May quarter, a trend that's pretty impressive. What's driving that strength? Have you seen any improvement in the ladies business, can you say quarter-to-date?

We -- that's probably a little too fine a definition for us. We just give you highlights for the first 2 weeks of May, and I think Bruce said we had a 3% comp for the first 2 weeks. I would say that these trends of the first quarter pretty much continued in to the second quarter to this point. There has been a little bit of a weather impact in the first quarter -- first week of Q2 was a nice warm week, and in the second week, last week was unfortunately a much cooler week. So our business is being a little affected not significantly, but a little affected by weather still as we're getting into the first half of the second quarter -- of the first half.

Okay, understood. Then shifting to SG&A, you talked about the one-time -- excuse me, the higher distribution cost. Is that one-time in nature? How should we think about the growth rate for the remainder of the year?

When you look at the expenses for the first quarter and recognize the fact that they were up about 4%, and assuming that inflation for salaries and rent and utilities and other expenses were probably around 2%. You kind of get a feel for what the incremental amount was for the extra distribution and store expenses related to the higher receipt level. Although I will also note that the 4.2% comp will also drive a little bit more expense than it would normally. So it's somewhere in that probably 1% to 2% range was related to unordinary distribution costs.

Okay, that's very helpful. And then just lastly, higher level question. You guys are still being conservative with opening stores, but you're really opening more stores this year. Where in particular are you looking to increase your footprint? Maybe just talk about the competitive dynamics outside of your core Southeast market. What is it like in the Northeast and the West for you guys, how have you performed there? Kind of what are the dynamics entering those markets with some more stores?

As far as new store growth and where it's going to be, we've basically have opened up the entire country to potential store new growth for us. And the stores that we've -- the deals that we've agreed upon to this point are spread across the country from California to East Coast, and to the Midwest. And we've been looking at stores in the Northeast, currently. So we've done well in all the markets and we don't see the competitive nature being consequentially different in any of our current markets versus the other ones. Did I answer all of your question? Was there another piece?

No, that's fine. So you are seeing that the competitive dynamics are pretty much the same when you kind of enter some of these other regions?

Yes, exactly. We haven't noticed anything in the markets we're in to this point that's of consequence we have from one market to the next. That's correct.

And the bulk of the store openings coming this year, are they primarily in the Southeast still?

I'm just trying to -- I'd say -- well, we have stores in the Southeast. We have stores in the Midwest, and we have stores in the West Coast. So we're only doing 5 or 8 of them, so they're kind of scattered around, but they're not concentrated in the Southeast, is really the short answer to your question.

Our next question comes from the line of Evren Kopelman with Wells Fargo.

This is Connie Wang in for Evren. So can you guys kind of provide an update on your merchandise initiatives. I know you talked about it briefly, but kind of the progress you made and where it is versus where you want to be. Is there any update initiatives that you want to focus on? And along that same line, are there any fashion trends in apparel you kind of want to play into for back-to-school?

Okay. It's a pretty broad question, so I'll ask Jason to sort of do the fashion trends question first, and then talk about the key merchandising initiatives across maybe ladies in the particular.

Sure. I'll talk a little bit about the trends right now. I won't give too much information there, because I don't want to give away competitive information, but I'll talk about some of the things that we see high level. Currently, shoes is our strongest trend in the company right now. In particular, gladiator sandals and sandals in general are very strong in ladies and girls. Dresses have been trending nicely in ladies, and the maxi dress is the strongest style as we head into the summer months. And as you mentioned in back-to-school, we actually see a nice comeback in denim. It's been a relatively soft denim year, really across all genders for the last couple of years. We see denim coming back with some new fashion trends kind of popping the denim mix, so we're excited about that. And if I was to talk about, I think your next question was a little bit about some of the initiatives, and where we are with things, maybe I would highlight just the nice things that we're doing in shoes, Accessories and Home. There, we're seeing strong comp store sales, really in shoes, in the Accessories departments and Men's, ladies and kids, as Ed mentions are delivering strong comp store sales increases, as well. We still feel that we are under-penetrated in both of those areas and see continued growth for 2014 and beyond. In addition to that, we are very happy with the Home business, and see continued opportunity in beauty, electronics, decorative home and functional home, as well.

Great. And then just kind of -- I know you've spoken about it before, but just with the great comps in kind of accessories and footwear. Where do you see that -- where can you see that kind of playing out in overall mix balance eventually, do you have kind of the thoughts on that or...

What we're going to do is really, we're very excited about shoes, accessories and home. And really, we're going to push those businesses until we find the right level. We're going to let that happen sort of naturally. We're going to keep funding the inventory in those areas and keep growing those businesses. And truly, we believe in those 3 classifications, shoes, Accessories and Home, are under-penetrated. So we believe we have a nice runway there. We're doing it intelligently and methodically. So that we don't incur unnecessary markdowns. But so far, we're very happy. We don't have a set number in mind, as the customer responds to the merchandise offerings, we're going to keep pushing those businesses.

Okay, great. And then how is the macro environment for a consumer? Is there anything you kind of see and are there any trends?

The -- we get this question pretty much every quarter, Connie, and I would say that as I've said before, I think the macro environment is improving for our customer. I would call out that I think the macro environment overall is still difficult, and it always has been more difficult for people on the lower end of the economic spectrum. But I think things are getting better for our customer, I think in particular as you look at Q1 '14 versus Q1 of '13, it was a better environment, because if you remember back into Q1 of '13, there was a lot of negative things happening and in particular, the payroll tax increase. And we've now anniversaried that, people have digested those impacts, and I think things are again, slightly better for our customers. Unemployment is down again, among African Americans. And so I think things are not great, not as good as they were more than 5 years ago, but better than they were.

Okay, great. Have you noticed any kind of regional differences in trends?

Not really. Other than the, we'll call out I mentioned, just when we were asked about sales coming into Q2, the northern stores definitely have been hit harder with weather than the Midwest and Southern stores. So they're getting off to a slower start in 2014 than our Southern more stores are, but we expect that to change in the next very few weeks.

Our next question comes from the line of Thomas Filandro with Susquehanna Financial Group.

So Bruce, just to confirm, I just want to understand as you said I think 38% is the sort of historic target on gross margin, and it looks like you obviously surpassed that this quarter. Is this a new opportunity, meaning that are you guys thinking that you possibly can achieve a gross margin above your historic sort of trend of 38%? And as it relates to that, maybe can you tell us, Jason, a little bit about Accessories and Homes. Do those typically carry higher margins? And then I have 2 follow-up questions.

As far as the 39% in the first quarter, probably the key thing to keep in mind there is that in most years, Q1 is the highest gross margin quarter, because it represents the beginning of the warm weather apparel selling season and therefore, doesn't have the same end of season markdowns that the other quarters have. And Jason, I'll let you talk to the other points.

Sure. We do actually -- shoes, accessories and home actually do have a better gross margin profile than some of the apparel classification for sure.

Okay, excellent. I don't know if this is relevant or not, but your website, just looks a little more robust, I know it's not a commerce website. I'm curious, is there any plans to initiate this site for commerce, and is it possible at all, get any evidence that this site actually influenced in-store purchasing?

Yes. We actually did, thank you for noticing. We did just update the website really last week. We did update, and we really wanted a fresher, more fashion forward look. We want the website to showcase some of the product we carry in Citi Trends. And we're pleased with the launch, and we'll continue to improve it every week. It's really only been live for about 1.5 weeks now. And we do feel that online selling and e-commerce is part of the future at Citi Trends. Our primary goal right now during this turnaround is to ensure that our brick-and-mortar stores are driving consistent and profitable comp store sales and we're healthy there. And as we get closer to that goal, I do think e-commerce is in our future.

Tom, we haven't been able to measure any impact of the website change to our business in stores. We have noticed though that there's significant more activity on our website, and so there's more request for -- to get information via e-mail, et cetera. But nothing yet directly in-store sales.

Okay. I've got to give credit to a co-op on our team, Mark, who actually highlighted that to me. I want to ask, one other question on AUR. AUR, what drove AUR being a little bit lower? Is that on the women side of the business, and should we expect, you might have said, but I may have missed it. Should we anticipate similar trend of AUR for the balance of the year?

Yes. Our AUR was down about 2% in the first quarter versus being down about 2% in the fourth quarter of 2013, and if you look at how we anniversaried it, it was down 12% in the first quarter of last year. For the balance of the year, we really see the AUR, AUS as slightly down to really flat. I think we've cycled through the value issues that we've had in the past in 2012 and working out of that in 2013. We've also cycled through a lot of the decrease penetration in traditional urban brands. A good piece of that is coming from the ladies area with that traditional urban brands that carried a higher AUS. So I don't see a major impact moving forward, like I said, slightly down to flat is how we see AUS over the next 3 quarters.

Our next question comes from the line of Pam Quintiliano with SunTrust.

So a few things. One very easy, that 3% May comp, can you give us what that compares to last year?

2%.

For the 2%.

The same 2 weeks last year, up 2%. This year same 2 weeks we're up right on top of 2%.

Okay. And can you just talk about your open-to-buy positioning, and if there's just any changes there that we should be aware off?

Our current open-to-buy philosophy is really more of an off-price buying philosophy. In the second quarter, we actually have a lot of liquidity to take advantage of deals that we're finding in the marketplace. So we're currently very liquid. We're currently in the market buying for June. We have June open-to-buy, as well as a lot of open-to-buy for July and go forward. So we take advantage of both, in season close-out opportunities, and we look for also next season buy, what we call NSB opportunities of terrific deals that we can pack away for next year as well.

And then just speaking to that, how is that compared to last year in terms of your liquidity for 2Q? It's same or more [ph]?

I think it would be similar, if anything, we probably have a little bit more this year than we did last year. I think one of the goals that I have with the team is to always remain liquid and especially with some of the tougher weather and some of the tougher times that other retailers are having. Traditionally, that's a very nice opportunity for us to take advantage of deals. We are seeing actually more deals in the marketplace than we have seen previously, or if I was to try to use the comparison versus LY.

Okay. And you're seeing more deals for in-season and next season buyers?

Yes, both.

Okay. And then you mentioned your team. Can you just talk about your team and how that's filling out, and just how big the organization is, and if you're doing additional hires on the merchandising side?

Okay. We'll keep this at a high-level. We'll go ahead and talk about more of the high-level.

Sure. Currently, right now, I'm very happy with the team. We actually have a full merchandising team. As you recall, we have most of our merchants are located right in New York City in the heart of the garment district, and we have a West Coast buying office where we have predominantly junior buyers and then we -- in Savannah, we have some buyers there as well. And currently, we really -- we don't have any open positions, which I'm thrilled about. We have a very strong team really across all 4 divisions. And they have been in their chairs now over almost for an entire year or even 2 years. So really if you recall in 2012, we were rebuilding the merchandising organization with more of an off-price DNA. We've done that in 2012, in 2013 and I feel very good about where we are moving forward.

As far as the numbers of the team, I think we actually disclose that, don't we Bruce in the 10-K? The size of the buying team, and the size of the planning allocation team. I think there were about 40 people in the buying staff buyers, and the buying staff who are located as Jason said, 90% of them are in New York. And we have people in West Coast and people here in Savannah. And we have the planning allocation support team here in Savannah. So I guess 40 and 25 or so for those 2 teams.

Okay. And just you talked about the branded product on the girls side of the business. How about on the guys side, just any change of penetration there, and what you're seeing on the branded cycle for the men?

Sure. In brands for men's, and actually, boys, we're actually seeing the emergence of some new brands that are right on point with our customer, and the customer is responding nicely to them. It's sort of like a new generation of men's urban brands. So we're super excited about that. We're testing, we're trying. We're getting some terrific off-price deals there, and the initial results are very, very promising. So we do see the emergence of some new brands in men's and boys.

Great. And then very last one, it's just any update, remodels or plans with remodeling? I'm sorry...

Sure. Anything regarding real estate are still being -- we're doing very conservatively. We'll expand stores and increase the size of stores or relocate stores. We're going to do 5 to 10 of those, again, this year and we're going to remodel in some fashion, another 25 stores or so. As I said we opened 5 to 8 stores.

And the remodels cost how much?

It varies dramatically. A minor remodel for us would be in the $40,000 to $50,000 neighborhood. A major remodel would be a couple hundred thousand dollars for us. And we're doing mostly minor remodels.

[Operator Instructions] Our next question comes from the line of Eliza Buddenhagen with Sidoti & Company.

Was the increase in comp store sales a result of the uptick in economic conditions, or do you feel it's more the turnaround strategy working?

I would say it's, because I think the macro environment is only slightly better. I would say it's more the fact that we're better merchandised and our merchandising strategies and marketing strategies are better than they were the previous year.

Okay. And do you still think that non-branded is right strategy for women? You mentioned like a new generation of men's brands, could that be the case for women's, or are you still holding steady to your non-branded apparel for women?

Well, we -- our strategy is to go where the market takes us, and there really aren't any viable ladies brands. If there were viable ladies brands, we would be selling them and there really aren't any brands that our customers really, really want to buy now. And so it really is a non-fashion play for us. And so that's that the strategy we're pushing hard and trying to be really, really good at that, and that's working. Our non-branded business has been showing nice increases now for probably 1.5 years. As I pointed out earlier in my comments, because we are still comping against improved big branded numbers. We're seeing decreases there and the increases in unbranded aren't quite yet enough to offset that. But we expect those numbers to flatten out or maybe even increase as we work our way through 2014.

And we are always on the hunt for a new brand if something emerges, but what we're seeing, macro in the industry is the female shopper, she's all about fashion right now.

Okay. And you mentioned some new product categories in the Home division. Can you offer any specificity?

I don't want to give too much away from a competitive nature, but we have tried probably 4 or 5 new classifications in Home, and certainly if you walk into a store, you'll probably see what they are very quickly. And the customer has responded very nicely to them, because quite frankly, they haven't been in the store before and the minute we put them in there, they have found them and bought them and been excited about them. So we're excited about those new classifications, like I said. I just don't want to give too much away here.

Okay. And just you went into a little bit about the second quarter. But what's your outlook on same-store sales for the rest of the year?

As you probably know, we don't forecast our sales or our earnings for quarter or year. And so we're fairly conservative on that, other than to tell you that we do expect to have comp store sales increases each quarter.

Our last question comes from the line of Patrick McKeever with MKM Partners.

A question on -- I know this is small, but it's something that's out there. The going out of business sales at Dots, did you see any impact there during the quarter?

Nothing measurable. We went back and looked at the Dots that we had competing with Citi Trends stores. There were over 40 of them out of our 505 locations. And so we didn't see anything measurable.

Okay, okay. And then just looking at the balance sheet, almost $110 million in cash and short -- cash and investments. So that leaves -- prior to the open today, that was more than 40% of the market cap of the company. So question is, any thoughts there on, perhaps share buyback or just doing something a little differently?

Patrick, the one thing that we've said all along is that we'll continue to be conservative with our cash until we're able to deliver consistent positive sales and profitability results. We've also said that that's something that we always talk to our board about on a regular basis every quarter, and in fact we've got another meeting with them in 2 weeks, so it will be a topic of discussion at that point in time. But that's -- we consistently said that, and that's our position.

Okay. And then you said on just the current May trend, the first 2 weeks of the month that there were some continued weather issues, perhaps, in the -- in some of your more northerly stores. How was -- what was the impact of the weather in the first quarter? I know the sales were kind of volatile by month and heavily influenced by the Easter shift, but I mean do you think weather was a neutral factor or net negative for the quarter?

It was a net negative. Yes, I'd say it was a net negative in the quarter. But I'd say, a slight negative, unlike some other people that have more northern stores than we do. Clearly, the stores in the North really were beaten about and have been beaten about and still are, to some extent, beaten about by colder than normal weather. Overall for Citi Trends, if you look through the quarter back in February and early March, we had a great sales that were tax refund driven. The weather was pretty difficult, but we had nice sales despite the weather there, but it was probably dragging us to some extent, maybe the slightly larger tax refunds offset that. March, as you may remember, was a brutal March in '13, but it was cold again this year. So that's kind of apples-for-apples. April, however, was warmer last year. That was one of the things that helped us end on a positive note in Q1 '13. This year's April was worse. We had colder weeks at the beginning of April, warmer at the end, kind of netting out April. And then we've opened up May, and that of course, so net-net on Q1, a negative, but a slight negative to us. Starting out in Q2, weather shouldn't be much of a factor, but it is definitely a drag on northern stores. I called out earlier that week 1 of May for us was a very nice warm week on average. That's slightly above average temperatures across including the North. Week 2 was 20 degrees colder in our northern stores. So the weather is still a bit of a factor in Q2.

And Mr. Anderson, there are no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

Okay, thank you, operator, and thank you, all of you for joining the call today. And have a nice day. Thanks.

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