Citi Trends, Inc. (CTRN) Q4 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends Fourth Quarter and Yearend 2015 Conference Call. [Operator Instructions]. As a reminder, this conference is being recorded Friday, March 11, 2016. I would now like to turn the conference over to Pat Watson. Please go ahead, sir.

Thank you, Suzie. Our earnings release was sent out this morning at 6:45 AM Eastern time. If you have not received a copy of the release, it is available on the Company's web site 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'd 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 and 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 fourth quarter and the full year results, and 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 fourth quarter decreased 2.8% to $176 million, while comparable store sales declined 5%. The lower comp store sales reflected a decrease of 5% in the number of customer transactions, while a 1% decline in the average unit sale, was offset by an increase in the average number of items per transaction. Our merchandise category, sales in the fourth quarter and comparable stores were as follows; Home was up 10%, on top of a 13% increase in 2014's fourth quarter. Accessories, including footwear, were down 2% this year, after being up 20% last year. The men's division decreased 7%, following a 13% increase in last year's fourth quarter. Ladies sales decreased 8%, after being up 16% last year, and children's sales were down 8% in this year's fourth quarter, compared with an 11% increase in 2014. Sales of nationally recognized brands represent 26% of total sales in the quarter, compared with 27% a year ago. Total sales for the full year increased 1.9%, while comparable store sales were down 0.1%. The average number of items per transaction and the number of transactions in comparable stores, were both up approximately one half of a percent for the year. However, they were more than offset by a decline in the average unit sale of just over 1%. Cost of goods sold, as a percentage of sales improved 110 basis points in the fourth quarter, due partly to an increase in initial markup associated with a higher level of next season buy merchandise purchased earlier in the year. In addition, markdowns were lower, reflecting strong inventory control measures taken by our merchandising group, including the benefits related through a new merchandise planning and allocation system. For the full year, cost of goods sold as a percent of sales improved 140 basis points, due to the same reasons as noted for the fourth quarter. SG&A expenses decreased $400,000 in the fourth quarter, due to the large incentive compensation expense in 2014's fourth quarter, when EBITDA increased significantly. For the quarter, SG&A expenses as a percent of sales increased 60 basis points to 32.4%, due primarily to the deleverage cost by the decline in comp store sales. For the full year, we were able to leverage expenses by 10 basis points, despite a slightly negative comp store sales results. Depreciation expense declined $300,000 during the quarter, as a result of opening fewer stores than in previous periods. Fourth quarter pre-tax income increased 15% to $6 million from $5.2 million last year. As for income tax expense, the effective tax rate was unusually low in 2014's fourth quarter, due to a greater benefit from work opportunity and other tax credits. For the full year, the effective tax rate was higher in 2015, primarily because tax credits were much lower as a percentage of pre-tax income than in the previous year. This was due to pre-tax income increasing by more than 100% for the full year at the same time the tax credits declined. Net income in the fourth quarter was $3.5 million or $0.24 per share compared with $4.7 million or $0.31 per share last year. For the full year, net income was $15.5 million or $1.03 per share, compared with $9 million or $0.60 per share last year. During the fourth quarter, we paid our second quarterly dividend of $0.06 per share and repurchased the remaining $7.7 million available under the board of Directors' $15 million 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 full year earnings increase of 72%, delivering $1.03 per share, versus $0.60 per share last year. In addition, our gross margin improved 140 basis points in 2015, and ended the year at a record 39%. While the full year comp store sales decreased 0.1% versus a 7.5% increase last year, was below our expectations, there were a number of positives in 2015. Total sales were up 1.9%. We implemented a new planning and allocation system to all merchandising divisions. We successfully opened 13 new stores. We introduced a dividend. We bought $15 million worth of our stock. We successfully tested e-commerce, and we continue to make progress on improved profitability. The fourth quarter comp store sales decreased 5% versus a 14% increase last year, fell short of our expectations. There were several factors that affected our sales results. First, the warm weather in November and December diminished winter product demand, especially in the south. Second, the delay in tax refund flow in January, depressed sales further. The last two days of fiscal 2015, comp store sales decreased 45% or $3.5 million versus the extremely strong final days of fiscal 2014, that were driven largely by the receipt of refund checks by our customers. Third, our summer-to-fall transition strategy, in which we transition quicker to fall inventories, while reducing short sleeve inventories, negatively impacted sales in the fourth quarter. The Home division was the standout division of the quarter, delivering a 10% comp store sales increase on top of a 13% increase last year. It was our 14th consecutive quarter of comp store sales increases in Home. Functional home, toys and beauty, all performed well. In 2016, we see Home as the strongest growth vehicle once again. This product allows for more breadth in our merchandise assortment, and provides a hedge to the weather driven demand of apparel. We have recently added buyers to this division and plan to expand its presence in stores. In addition, we continue to see growth opportunity in the expansion of shoes and accessories across all genders and age categories. Now I will provide an update on sales to date for the first quarter; sales for the first five weeks of 2016 in comparable stores have decreased above 3%. We attribute much of the decrease to a significant tax refund flow delay in the first 10 days of the first quarter. Sales through the first 10 days of the quarter were down 35% on a comparable basis, continuing the effects we saw for the last couple of days of fiscal 2015. Once meaningful tax refund dollars begin to flow on February 10, sales improved immediately, and we have had positive comp store sales increases since then. We are hopeful that the recent positive sales trends continue, and we are able to deliver a flat quarter. Spring sales have been favorable with a mild weather, and we have seen a very nice response to our offering in dresses, sandals and shorts. In addition, Home continues to deliver strong results. For the balance of 2016, we continue to strive for consistent positive comp store sales increases in each quarter. Our inventories are in good shape heading into the first quarter. Comp store inventories finished the fourth quarter of 2015 at up 1%, whilst total inventories, which include new stores and next season buys were up 4.5%. Due to the warmer weather in November and December, we were able to capitalize on extremely compelling next season buys for fall winter 2016. This should help us execute and improve second half this year. We see inventories for the year up 4% to 7%. We intend to keep comp store inventory flat to slightly up, while funding new store growth in next season buys. We successfully opened five new stores in the first five weeks of the quarter; Windsor, Connecticut; Forest Park, Georgia; Douglas, Georgia; Apopka, Florida; and Philadelphia. In addition, we relocated or expanded five stores. As of today, we operate 526 stores in 31 states. During 2016, we plan to open between 15 to 20 new stores. Relocate or expand 10 to 15, and remodel about 20. Thank you all for your time. Operator, we will now take any questions.

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

Hi guys. Thanks for taking our call. This is actually Nick Hyatt on for Pam. First, I just wanted to ask you a little about the health of your consumer, and if there is any meaningful change in sentiment, I guess, excluding the tax refund delays, if you can just talk about the other factors out there, such as gas prices, and anything else you are seeing?

Sure. Thanks Nick. I will take that question. Similar to what I have said on the past few calls, the macro environment for our customers seems to actually be favorable. Both African-American unemployment, as well as low income unemployment are low. Additionally, gas prices continue to be low. Both of these trends are good for our customers. In theory, all of this should be good for the macro environment, and actually we see our customers pretty healthy.

Great. I guess next, can you talk about whether -- I know you mentioned, warm weather, especially in November and December; I mean, could you just maybe, go little further on that and maybe what categories it impacted specifically? And also, could you talk about the winter storms, and if those had any impact, such as winter storm Jonas in January?

Yeah sure. I can give you a little bit of color on that. Certainly in November and December, what we saw was dampened demand in our fall winter classification. That would be, things like coats and jackets and sweaters and long sleeve product. And really, you could see it by weather zone, our sales were stronger in our colder weather zones in the north, and were weakest in the warmer weather zones and the hot zones. So you could really see it by classification. In addition to that, as we mentioned, we transitioned earlier. We had less short sleeve products in some of those warmer zones, so that also dampened sales as well. The winter storms, we obviously did see some of that, and sales were affected by that. But I would tell you, that was smaller in comparison to really the effects of November and December. January is not a real big month for us, except when you get to the end of January. But I'd say November-December were significant.

Got you. Thank you. And just our last question is, we started to hear about some new trends on the women's side. Are you seeing anything there?

Sure. I can give you a little update on trends or what we are seeing. Actually, with the favorable weather pattern actually over the first five weeks. We have seen spring related classes pick up nicely like dresses, sandals and shorts. In ladies in particular, we seem to be moving back into a fashion top cycle, with woven tops being very strong, we wear more [ph] in a knit cycle. Specifically plaid and denim tops, which were very strong in the fall, are continuing to be very strong in short sleeve and sleeveless versions. Also, that sort of means that bottoms have shifted more into solids, as fashion tops have become stronger and there is more of an emphasis on the top, that means that bottoms will become a little bit more solid and core in nature versus fashion.

Got you. Perfect. Well thank you very much for taking our questions, and good luck on the quarter.

Okay, thanks. You bet.

Thank you. [Operator Instructions]. Our next question comes from the line of Patrick McKeever with MKM Partners. Please proceed with your question.

Thanks. Good morning guys. On the national brands, the penetration -- do you think it's going to kind of continue to sort of stabilize and I think you said 23%, 24% area in the fourth quarter? Or have there been any changes within the different departments, men's and women's and kids in terms of any new brands that are coming on, that might change that positively or could it trend lower?

I would say overall, sort of at 20% to 25% area, we see it stabilizing it right there. There are no major shifts or changes that we see men's -- our men's and our boy's area has the strongest brand penetration, whereas ladies and girls has the smaller brand penetration. But I see that pretty much stabilizing right around there. I'd tell you, in the second quarter, it normally does dip down as the second quarter is usually more of a real aggressive value driven quarter, whereas the first quarter is a little bit more branded. But I see those trends pretty much stabilizing. I think we are going to live somewhere between that 20% and 25% range for the most part.

Okay. And then on the tax refund dynamic, Jason, you talked about how business picked up pretty significantly. Did you say the 10th of February?

Yup.

Okay. So the question is, I think, in years past when there has been this -- we had this issue, where tax refund dollars have been distributed late. Doesn't it elevate the risk, that those refund -- that money will get claims, so to speak by other things like bills -- overdue bills or bill paying and that kind of thing. I seem to recall, that that has been the dynamic in the past, where there is an expectation that the later dollars would benefit business, and then it didn't necessarily materialize, but I could be wrong?

No. Patrick, I think you're exactly on point, and I think you saw it in our sales. We originally -- we were very hopeful that that $3.5 million that we didn't get in January, is going to just shift right nicely down into the first week of February. We are very hopeful, that that would happen, and it didn't. When tax refunds were delayed an additional 10 days, we just kept getting further and further behind. Those 10 days last year were very powerful days, and they have proven difficult to make up. And we don't know why, but I think you alluded to it, later tax refunds at Citi Trends are definitely -- they are less robust than earlier tax refunds, and that's why you didn't see sort of a catch-up. We have definitely done some catching up, because like I said, we were down 35% in those 10 days, and they have made up a lot of ground. But that's why I am being very conservative with sort of the outlook for the quarter, because I don't think we are going to see a lot of that -- those dollars come back to us. I think it's kind of in those numbers right now, just as you alluded to. Later tax refunds aren't great for us. I mean, in general, and overall though, we feel very good about our merchandise mix, our values, the quality of our inventory, and the fundamental health of our business. So we are happy about where we are. We are certainly disappointed that the taxes showed up late. But now, we just have to move forward and capture what we can from here.

Okay. Got it. And then just one last one on the home business, which is probably about 5% of the total value on sales now?

Soon to be going to 5%.

So how big do you think that business can get over time, and how do the margins stack up versus your apparel -- hanging apparel business?

You know what, we don't have a specific growth plan in place to say hey, let's get to this number. We are at about 4% right now. I see a lot of runway in this business. I would tell you, in 2016, we are going to push this business very-very hard. Actually the margins in the home area are as good, if not maybe a tick better than some of the apparel margins, and right now, we are getting faster turns in Home. So again, we can push that business, get faster turns, and improve margin as well. And just to give you an idea of Home, as Citi Trends covers sort of a broad area of different things. What we count in that is beauty, electronics, books and media, decorative home furnishings, functional home for the bedroom, bathroom and kitchen, as well as auto and the Q-line. In many of those classifications Patrick, we just started buying in 2014 and 2015 for the very first time. We actually think, in addition to sort of quicker turns in margin, that these classifications help to weatherize our business and provide breadth of assortment to our customers, and we think that's a real positive as well. So we are excited about really getting after this in 2016.

Thanks very much.

Thank you.

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

Okay. Thank you very much everyone for your time, and have a great day.