Citi Trends, Inc. (CTRN) Q3 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends' Third Quarter 2015 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, November 24, 2015. I would now like to turn the conference over to Pat Watson. Please go ahead, sir.

Thank you. Good morning, everyone. Our earnings release was sent out this morning at 6:45 a.m. Eastern Time. If you have not received a copy of the release, it is available on the Company's 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 you should not place undue reliance on these statements. 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 would now like to turn the call over to Bruce Smith, Chief Operating Officer and Chief Financial Officer. Please go ahead, Bruce.

Thanks, Pat. Good morning, everybody. Thank you for joining us today. Also on the call is, Jason Mazzola, President and Chief Executive Officer. First, I will provide you with details related to the third quarter and year-to-date results. Then Jason will further discuss the results and our business outlook, after which we will address any questions you may have. Total sales in the third quarter increased 1.4% to $159 million, while comparable store sales declined 0.5%. The lower comp store sales reflected a decrease of 1% in the number of customer transactions and a slight decrease in the average unit sale, partially offset by a 1% increase in the average number of items per transaction. Comparable-store sales during the third quarter were flat in both August and September and down 1% in October. By merchandise category, sales in the third quarter and comparable stores were as follows. Home was up 14% on top of a 11% increase in 2014's third quarter. Accessories, including footwear were up 3% this year and up 18% last year. The ladies division was down 3% this year after being up 4% in last year's third-quarter. Men's sales were down 3% this year and up 2% last year, and children’s sales were down 3% in this year's third quarter after being flat in the third quarter of 2014. Sales of nationally recognized brands represented 23% of total sales in the quarter, compared with 28% last year. For the first three quarters of the year, total sales were up 3.7% and comparable store sales were up 1.7%. Cost of goods sold as a percentage of sales improved 150 basis points in the third quarter, due partly to an increase in initial markup associated with a higher level of next season buying merchandise. In addition, markdowns were lower reflecting strong inventory control measures taken by our merchandising group, including the benefits related to a new merchandise planning and allocation system. For the year-to-date, cost of goods sold as a percent of sales has improved 160 basis points, due primarily to a reduction in merchandise markdowns. SG&A expenses decreased $700,000 or 1.3%. This year's third quarter included a $900,000 pre-tax benefit from a legal recovering, which had a positive impact on income per share of $0.04. Last year's third quarter included a $1.7 million legal settlement expense, which had a negative impact on loss per share of $0.07. Otherwise expenses increased at an expected rate due to store growth and nominal inflation in cost. Depreciation expense declined more than $400,000 during the quarter as a result of opening fewer stores than in the past. Net income in the third quarter was $600,000 or $0.04 per share compared with a loss of $2.2 million or $0.15 per share last year. Year-to-date, the company has net income of $12.1 million or $0.79 per share compared with $4.3 million or $0.29 per share in last year's first three quarters. Our balance sheet remained strong with inventory in excellent shape and cash and investments continuing to exceed $100 million. As a reminder, we announced our first cash dividend and a share repurchase program in August. During the third quarter, we paid our first $0.06 quarterly dividend and repurchased 300,000 shares for $7.3 million, leaving $7.7 million available under the Board's repurchase authorization. Now, I will turn the call over to Jason.

Thank you, Bruce, and good morning, everyone. We are pleased that we achieved a profitable third quarter for the first time since 2009. Gross margin improved 150 basis points during the quarter. Year-to-date earnings per share of $0.79 versus $0.29 last year reflect our continued progress on improved profitability at Citi Trends. This year, we executed a more aggressive spring to fall transition strategy in order to achieve quicker inventory turns and fewer markdowns. During the quarter, we were able to achieve quicker turns and fewer markdowns. However, the execution of this strategy had a negative impact on third-quarter sales. By reducing inventories on spring and summer merchandise earlier than we had in the past, we gave up some sales in spring related classes like shorts and short sleeve tops. Even though we flowed fall inventory earlier than last year and picked up additional sales in classes like fleece, long-sleeve knits, and sweaters, it was not enough to offset what we gave up in spring classes. We believe, we can better balance this next year and expect that we can pick up some of those lost sales without negatively impacting gross margin. In addition to the transition strategy impacting the third quarter, the weather was not favorable versus last year. This put some pressure on sales during the quarter. We once again drove strong sales in the home area, delivering a 14% comp store sales increase for the quarter on top of an 11% increase last year. Functional home, beauty, and Q-line [ph] were standout areas of the quarter. We continue to see growth in the home area driven by the expansion of current businesses while developing new categories that resonate with our customer. Growth in accessories, which includes footwear continued with a 3% comp store sales increase on top of an 18% increase against last year's third-quarter. Accessories have now increased 17 consecutive quarters, watches and luggage were standout businesses in this area. Sales for the fourth quarter are off to a slow start versus last year. Last year, for the first three weeks of the fourth quarter, sales increased 12% on a comp store sales basis driven by colder than normal temperatures. This year, sales have decreased [indiscernible] based on warmer than normal temperatures. Over the past few days, as the weather has moved to colder temperatures, sales have turned positive. Therefore, we believe that as weather trends normalize and sales improve, we will be able to deliver a flat to slightly down comp store sales quarter. Our inventories are in excellent shape heading into the fourth quarter as we took a conservative stance on buying. Comp store inventories finished the quarter at negative 5%, while total inventories which include next season buys were up only 0.7%. We intentionally held back spending open to buy dollars for the fourth quarter to ensure that we could take advantage of opportunistic buys in the market and so that we were appropriately positioned to deliver improved gross margin in the quarter. Additionally, we believe, the warm weather trend in November, which has negatively impacted apparel sales will translate into compelling next season buys for 2016. We successfully opened two new stores in the quarter, Tampa, Florida and Worcester, Mass. At quarter, we operated 520 stores in 31 states. We plan on opening two more stores during the balance of the year, which would bring the total to 13 new stores for 2015. In 2015, we have remodeled 24 stores and expanded or relocated 13. In 2016, we plan to open 15 to 20 new stores. Thank you all for your time. Operator, we will now take any question.

Thank you. [Operator Instructions] Our first question is coming from the line of Pam Quintiliano with SunTrust. Please proceed with your question.

Hi. Good morning. This is David Kwon for Pam Quintiliano. Thanks for taking my question. In terms of new fashion trends, how do you see the consumer in responding and how stable do you think those are longer term?

Could you repeat the last part of the question? I heard the part about the trends. What was the last part of the question?

How do you see those playing out longer-term?

Sure. I will give you just a little bit of color on that. During the third quarter, the trend overall I would say leaned towards non-apparel. Our non-apparel businesses of accessories, including footwear, home, beauty, and electronics were all very solid and that includes our watch business as well as luggage. I would say the one fall trend that we have been pretty pleased with thus far is fleece selling, both fashion fleece and basic fleece has been pretty strong across men's, ladies, and kids, and that has been good to see and we see that continuing through the holidays.

Great. In terms of your core consumer, how you see the health and could you give us any additional granularity on how you think they are feeling in terms of their buying power, and given unemployment rates are low and macro is relatively better than last year.

Yes. I would sort of agree with what you just said there on the macro. I think the environment for our customer does seem better than last year at this time; both Africa American unemployment as well as low income employment is I think more than last year. Additionally, gas prices are as low as they have been in some time now. Both of these trends are very good for our customer. In theory, all this should be good for the macro environment of our customers, so weather plays a role, but otherwise I would say the macro environment for our customer is pretty healthy and it is more positive than last year.

Okay. Last one, in terms of the new merchandising and planning system, how much run rate do you see going forward in 4Q and next year in terms of improvement in your overall gross margins?

No. I think, Bruce and I on the last call said that we can move the Company to a 39% gross margin for this year. We would like that for 2015. We have not said publicly a number higher than that for 2016, but certainly our goal here is to continue making improvements and profitability. We do think we have nice runway in our planning and allocation system. We fully got it up and running in 2005, and we think there's more that we can do with it in 2016, so we are quite excited about it. We are quite excited about the team that we have in planning and allocation, they are doing a doing a terrific job so far, so we are real happy about it.

Thank you very much.

Thank you. Our next question is coming from the line of Patrick McKeever with MKM Partners. Please proceed with your questions.

Yup. Thank you. Jason, on the fourth quarter same-store sales guidance, the flat to slightly negative guidance, what does that assume for tax refund timing? The distribution tax refunds, because I know that can have a major impact on your business at the very end of January.

No. You are absolutely right. What we have assumed is really the same distribution as last year, Bruce, would not you agree with that?

Absolutely, and that is how we are looking at, so that there is not a different either positive or negative.

Okay. Got it. Then on the inventory open to buy, how much could that impact the fourth quarter? I mean, I know – so many apparel retailers are talking about excess inventory and aggressive markdowns and promotions in the fourth quarter and some are talking about canceling orders that sort of things. Obviously, there is a glut of merchandise out there. I mean, is there product to - are you quick enough to be making purchases today to have product in the stores in front of Christmas, particularly the last few days before Christmas? Is that an opportunity or are you thinking more pack-away for early next year?

No, Patrick. I think you are exactly on point. There has been a lot of product out there in the market. We think there's a great opportunity for NSD, but really why we held back the open dollars was, A, to make sure our inventories were in terrific shape, which they are as you have heard me mention. Second, so the merchants could be in the market buying for Christmas. We could see things softening up and we saw more products in the market, so we held them back a little bit so that they could make deals right now that we can get on the floor for Christmas, so I think it's two-fold the opportunity is we have got some product on the floor for Christmas that were great and compelling deals as well as we think we are going to see some very nice deals for NSD for 2016, so I think it is two-fold.

Okay. Then just my last one on the traffic being down, I think you said 1%?

Yes.

Okay, so over the past couple of years or so, the big acceleration in the same-store sales has been primarily traffic-driven. Is that a cause for concern that they were down in the quarter; the traffic was down in the quarter or do you think a lot of that was just the weather and your customer needing a weather catalyst to get in and make some seasonal purchases?

Yes. I am leaning definitely more towards the weather. I do not see a major concern here. I think when you look at really even October and some of the weather that we got there, we’ve had some historic rainfall in South Carolina. I mean, our customer is a bit of a buy now, where now customer - our customer does get prompted by the weather, so with a little bit of wind in our sails, she is coming into the store. Otherwise, you need a little bit to move towards that. Overall, I think was weather-related and not a major concern.

Got it. Thank you, Jason.

Yes.

Thank you. Our next question is coming from the line of Tom Filandro with SIG. Please proceed with your question.

Hi. Thank you. Jason, could you guys maybe give us some insight and what opportunities do you see near-term in terms of what you guys are doing around the peak holiday selling period like this week coming up. Are you doing anything differently year-over-year during the low period this year and then I have a couple of follow-ups?

Sure. I can tell you a little bit of what we have in store for even Black Friday and the holiday timeframe. We believe, we have a very compelling gift giving mix across the store for the entire family. I think, we have taken up the gift giving higher than we have in previous years. We do not do door buster items as you know them from specialty or department stores. Our goal is to be trended to deliver compelling value every day to our customer. On Black Friday, we do try to call attention to some standout deals that the merchants have made. Our customers tends to shop us for Black Friday and for the holiday season for day-to-day needs, special occasion need as well as gift giving. We try to meet their needs on all those fronts, but I would say it if anything is different from last year it is we have taken up our gift giving strategy this year.

Fantastic. Just going backwards a little bit, denim was a classification that you noted as being positive. I think last time, we all stoke. How did denim perform during the quarter and do you think that there is trends here emerging that could play well into 2016?

Yes. Overall denim sales, they were actually during the quarter flat to last year. We had hoped actually for a little bit more fashion denim probably underperformed our expectations while core denim or more basic denim actually outperformed, so the net result was flat. We still see denim as a very, very important classification. Overall at Citi Trends is one of our best fourth quarter drivers and it is a nice driver also in the first quarter as well. It is a big piece of our business at Citi Trends, so we see that as strong. Again, we are looking for ways to actually make it even better. In this environment, I think there will be a lot of opportunistic deals we can take advantage of that could give us a boost there.

Okay. Then just a quick fast forward into spring, if you could maybe highlight where maybe it is too early, but can you highlight maybe where you think the greatest opportunities are when we look your year-over-year?

I would tell you probably the biggest opportunity really outside of what I have said about home and accessories, I still think we have runway in the home areas and the accessories area to continue to add breadth to the merchandise mix there. We are still not in certain classifications that some of our competitors are in. I think as we continue to add breadth, we can add diversity to the store, give customers a new reason to shop. In addition, I overall think there is opportunity in apparel to just be better and the merchants have now been at Citi Trends well over a year. We rebuilt the team there and they were all getting it better flavor and feel of our customer, so I think there is opportunities to be made there as well both, on that side.

Okay. One final one, just an update on the web performance, are you still sort of in test mode or is there any plans to more aggressively build that channel distribution?

Sure. Right now I would still say we are in test mode. I mean, we are very happy with the progress we have made on ecommerce so far. We have been able to grow our business and steadily add new classifications to the site throughout the year. Importantly, we have done is without affecting the overall profitability of Citi Trends or our capital position. We will continue to grow the business during 2016, so we can understand what type of opportunity e-com represents, whether it is going to be a nice growth vehicles for us or is it more of a marketing vehicle for us, so we are still in that test mode, but in 2016, we are going to get more serious about it.

Thanks. Best of luck in holiday season, Happy Thanksgiving to all of you.

Thank you. You too.

Thank you. [Operator Instructions] our next question is coming from the line of Brian Rounchek with BLR Capital Partners. Please proceed with your question.

Hey, guys. I missed your prepared remarks in the beginning Bruce. Will you talk about Tom's spend month if you do not mind repeating those?

Sure. We were flat in both, August and September and down 1% in October.

Great. Thank you very much.

Thank you. Mr. Mazzola. There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Thank you, everyone, and have a happy Thanksgiving.