Citi Trends, Inc. (CTRN) Q1 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends First Quarter 2016 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 Wednesday, May 18, 2016. I would now like to turn the conference over to Mr. Pat Watson. Please go ahead, sir.

Thank you, Sylvana. 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 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 Form10-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, 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 quarterly results, and then Jason will discuss further the results and our business outlook, after which we will address any questions you may have. Total sales in the first quarter decreased 0.6%, to $194 million, with comparable store sales declining 2.7%. The lower comp store sales reflected a decrease of 3% in the average unit sale and a 2% decline in the number of customer transactions, partially offset by a 2.5% increase in the average number of items per transaction. By merchandise category, first-quarter sales in comparable stores were as follows. The home division was up 22%, on top of a 13% increase last year. Accessories were up 4% after being up 2% in last year's first quarter. Men's sales were down 2% this year and down 1% last year. Kid's sales were down 8% this year and down 3% last year, and ladies sales were down 9% this year, after being up 7% in last year's first quarter. Sales of nationally recognized brands represented 24% of total sales in the first quarter of both years. Comparable store sales by month in the first quarter were down 6% in February, down 2% in March, and up 1% in April. Cost of goods sold as a percentage of sales increased 50 basis points in the first quarter, due primarily to higher mark-downs resulting from the comp store sales decline. SG&A expenses were in line with our plan for the quarter, increasing 4.5%, which reflects the impact of new stores and normal inflation in the expense base. As a percent of sales, SG&A expenses increased to 30.1% from 28.6%, due primarily to the deleverage caused by the unplanned comp store sales decrease. Depreciation expense declined by over $400,000 as a result of opening fewer stores in recent years than in the past. First-quarter net income in 2016 decreased to $8.7 million, or $0.60 per share, compared to $11.3 million, or $0.74 per share, last year. Now, I will turn the call over to Jason.

Thank you, Bruce. And good morning, everyone. The first quarter comp store sales decrease of 2.7%, versus a 2% increase last year, fell well short of our expectations. One of the key factors in the sales miss for the first quarter was the delayed start to the tax refund season. Additionally, our apparel merchandise offering was not as compelling as it should have been. I will speak more about that later. But there were a number of positives in the quarter. Our non-apparel sales were very good again. We continue to manage our inventories well, and we're positioned to drive positive comps. We successfully opened five new stores, and expanded or relocated six stores. The delayed start to the tax refund season had a significant negative impact on our sales. Comp store sales for the first 10 days of the quarter dropped 35%, as meaningful tax refunds did not start until February 10. This decrease proved to be too much to make up during the quarter. While all of the apparel departments performed better in April than they did in February, overall apparel sales during the quarter were weak, particularly ladies and kids. The late taxes dramatically affected these businesses, but our merchandise offering was not as sharp as it needed to be. In ladies and kids, we did not have the right balance of fashion and core product, and our values were not as exciting as they should have been. These are both correctable issues with our flexible off-price buying model. In both areas, we've taken the appropriate steps to improve our value equation and deliver a balanced merchandise mix at incredible prices. We are working hard on these changes during the second quarter, and coupled with an improved transition strategy from spring to fall, we believe we will deliver better results moving forward into the second and the third quarters. We are excited about the performance of the non-apparel areas during the quarter, both accessories, which includes footwear, as well as the home area. These two non-apparel areas accounted for over one-third of our first-quarter sales. Accessories delivered a solid 4% increase in the quarter. Home, however, was the standout division, delivering a 22% comp store sales increase on top of a 13% increase last year. It was our 15th consecutive quarter of comp store sales increases in home. We have broadened the home mix nicely over the past six months, and believe we have good runway here to drive continued comp store sales increases throughout the year. We see home as the strongest growth vehicle in 2016. We do see pressure on our AUS moving forward in the year. Increased sales of the home merchandise, which carries a lower than average AUS, is one reason. Additionally, the apparel landscape has become extremely promotional, and we need to ensure that we are delivering wow value to our customer. Therefore, we anticipate the AUS being down low- to mid-single digits for the balance of the year. Offsetting this decrease in AUS, to some degree, is a positive trend in the number of items per transaction. Now, I will provide an update on sales to date for the second quarter. Sales for the first two weeks of May in comparable stores have decreased about 2%. This compares with an increase of 13% last year in the same time period. Overall, the second quarter was strong last year, as we delivered a 4% comp store sales increase. We are hopeful that the strength of our non-apparel businesses and improved spring to fall transition strategy, as well as other improvements in our apparel assortment, will result in improved sales momentum moving forward. Our inventories are in good shape heading into the second quarter. Total inventory was up 6%. This reflected our previously outlined strategy of increasing inventories 4% to 7%. The primary use of the additional inventory is to fund next season buys, new stores, the home expansion, and key spring classes like sandals, shorts and dresses. We like the quality of our inventory, and we believe we're positioned to drive sales. We successfully opened five new stores within the quarter, and relocated or expanded an additional six stores. As of today, we operate 526 stores in 31 states. During the second quarter, we plan to open four new stores and relocate or expand three. For the full year, 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.

Thank you. [Operator Instructions] And our first question comes from the line of Pam Quintiliano with SunTrust. Please proceed with your question.

Great. Thanks so much for taking my questions. So I have a few for you guys. If you could just talk about the health of your core consumer and with the delayed tax refunds, this is something that has happened in the past. Is there a way to recapture those sales or once you miss it for those -the beginning of the quarter is it just impossible to overcome that hurdle? And then I have a follow-up from there.

Sure. Just so I understand the question, we talked - I will give you an answer on the core consumer, a little bit on the macro or the tax refunds and then we will go from there. So as it relates to the macro environment for our customer, I would tell you that it seems to be slightly positive in comparison to a year ago, both African American unemployment, as well as low income unemployment, are low. Gas prices continue to be low, versus where they were this time last year. Some of the wage increases that have happened of the past two years would likely benefit our customer. I would tell you these macro trends should lean towards a positive for our customer. However, we really haven't seen these macro trends manifest themselves in our sales. And overall, just to give you a little more color on that, too, I believe that the sales results have more - our sales results have more to do with the things that we control rather than they do with the macro trends of this customer. If we delivered a balanced fashion to core assortment in our apparel areas, with trend right merchandise at incredible values, we would have driven a positive comp for the quarter. We are capable of it. In 2014 and 2015, we delivered six positive comp quarters in a row, because we executed our apparel strategies very well and all of those areas were on point. We have a flexible business model that allows us to take advantage of weakness in the market, chase trend right product, and offer overly compelling value. I think better execution in our apparel areas will lead to consistent positive comps. And right now, I am working with each of the apparel teams on the execution of our model, and I expect better performance over the next few quarters. So that's a little color on the macro. I would tell you on the taxes, we did make back some of those taxes. Once meaningful tax refunds began to flow, we started to see some of those dollars come back to us, but they were just not as robust. It is something that we actually saw in 2013. The exact same thing happened, and those dollars don't seem to come back. We are not sure exactly why that is. They just don't. They don't come back the way that they - the way they should. We have also found that the earlier taxes come, the better and stronger and more robust that that business really is.

All right, that was exactly what I was looking for. Thank you. And then as far as the balance of fashion and core, which you spoke about in the prepared commentary and again now, what was it, what should it be, was there a dramatic shift in how you were addressing it or you think, in the consumer wants? And then you are optimistic about the transition and the spring to fall transition. So when do you think you will have that proper balance, reflecting your lead times, and just when did you begin to realize it wasn't working, and start to adjust that mix?

It was a few questions there. So I will address them, and if I miss something, you can circle back to it. It was a little hard to read the landscape with the later taxes because, as we move through February, it was difficult to tell without taxes being down 35% every day, and then when they started to come back, we saw a nice positive sales from that. So it was difficult to read. I would tell you, it was probably in the April timeframe that we realized something was off, particularly in juniors and kids. And at that point in time, we did star to adjust. We buy very close to needs, so we have opened a buy out for two months. So right now, we're actually buying deals for June and July. So we can make changes very quickly. We can respond to quick changes in the marketplace. And what I would say in ladies, it was a question of we didn't own enough of the trending merchandise to make a really strong impact on our business. I would say that was probably the biggest issue in ladies. I would say in kids, quite honestly, we owned probably too much of the high-fashion looks, and those high-fashion looks were not a strong enough value. I would tell you in both of those cases, we began realigning them and going after them, and I would tell you that we are starting to see improvements there. And that I am hopeful, for back-to-school, we will have a very different scenario. Because like I said, we can affect changes in our business very, very quickly. I think you also asked a question about the transition strategy of going from spring to fall. I think last year, we were very aggressive at reducing our spring/summer inventory, and we missed a lot of sales as a result. So this year, we wanted to bring that more in line, capture some of those spring and summer sales, and also preserve our gross margin. So we learned a lot from last year's transition, and we think we can do it better this year.

And just the mix, was there a dramatic change in what you are offering when you talk about the fashion to core? Did you change the amount of fashion you were offering with women's, or did she change what she was looking for? You get what I'm saying…

Yes, I do. She changed what she was looking for, and we weren't quick enough or bold enough to get in front of that. We probably had some fashion that she really liked last year, and hung on to that a little bit too much in some of the nice trends. Like for example, lace and crochet were very strong, and we own some of it; we should have owned a lot more of it. But it was new, and we were probably not as aggressive as we should have been moving towards it. So some of those fashion, when fashion changes, we have to be able to move quicker to it.

And my very last question, thank you for entertaining me with this. Jason, just because you have such a read on this, and you mentioned the lace and the crochet, anything else that you are excited about that's on the horizon, fashion-wise?

Yes, I would tell you, right this minute, certainly, we feel very good about sandals. Sandals have been terrific both in girls and ladies, especially in gladiator and thong styles. In addition to that, dresses and rompers have been great in ladies and girls. So we think there's a real nice opportunity, in second quarter, for both of those. And those - they are good spring, summer classes, and we feel that we are well positioned to take advantage of that.

Great. Thanks so much, and best of luck.

Thank you.

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

Thank you. Good morning, guys. I guess continuing on with the merchandise trends while you talked about dresses and rompers in girls and women's doing well, and sandals. How about your jeans business? How did that do in the quarter, anything new there? And what's the thought going into, let's say the back-to-school season for jeans?

Yes, I would tell you, it's interesting that - I would tell you our core denim, our price point in denim, was stronger in the first quarter than our high-fashion denim. So we did see a little bit more of a swing towards cleaned up looks and price point in denim. I would say as we go into back-to-school, as you know, that's probably our biggest, most important piece of the back-to-school assortment across men's, ladies and kids. And we think we are going to have a very good balance of the price pointed denim, core denim, as well as fashion. I think probably the most important trend in fashion denim right now is rip and repair and those type of looks, and we feel like we are well positioned to capture back-to-school sales there.

Okay. Great. And then in the home area, just also digging a little bit more deeply, what items are working the best that have - what has been contributing most to the strong trends there. And is there any plan to perhaps expand the square footage in home? Do you feel like you've got enough currently, would you consider taking some away from apparel? And then just thinking out, you said you expected that to continue to be the strongest area of the store through the year, what kinds of options, I guess, does your customer - core customer have to buy that merchandise and how do you feel about just the general marketplace?

Yes, sure. Couple of questions there. I'll start – I'll try to answer them all. If I miss something, you can just remind me. As far as square footage goes, we absolutely think there is an opportunity to take more square footage in the store, and we are doing that right now. We're in the back corner of the store, so we are creeping across the back and we are creeping up, so to speak. So we are taking more square footage, and we're devoting more fixturing to home. And interestingly enough, Patrick, what we're seeing is just new products are working. The tried-and-true products that we've been selling for a while are good, but we are expanding and adding those. So those would be things like beauty and electronics, books and media, decorative home. We've always carried a little bit of those, but now have expanded those nicely. We have, as I mentioned on the last call, we have more buyers in the area, so we're getting more coverage and we are broadening out the mix in areas that we've been in the past. But I will tell you new areas, like the functional home area, which is really functional home items for the bedroom, bathroom and the kitchen, as well as the Q line, are all brand-new. Some of these classifications, we didn't start buying until 2014 and 2015, and every single day, we are learning about new items that the customer wants, and what they are excited about. So it's been very good. That's where a lot of the brand-new growth is coming from, just having cookware in the store. We never carried cookware. Now, we're introducing some pieces and we're getting great reaction to it. So we will definitely make some mistakes along the way as we figure out what exactly this customer wants, and to your question, about what options does she have? We're still figuring out exactly what the mix is. There's a nice element of, hey, fashion that she wants at a great value, and then basic core product at a great value. Value is our number one equation, whether it's a fashion piece or a basic piece. But so far, so good, there's a lot of runway here. We are very, very excited about the home business. And importantly, I think the more home we can get into the store, it insulates us against, certainly, some of the dramatic weather impacts that we have seen. When weather isn't working in your favor, it really doesn't affect the home areas as much as it does the apparel areas. So we're excited about some insulation from the weather-dependent demand of apparel.

Okay. Yes, you got everything. So on that question, just the last one, and I apologize if I missed this. I have been multi-tasking a bit this morning, so I had to jump off the call for a second. But did you give a comp May, for the second quarter to date, the May month to date period?

Yes, we said that we were down about 2% for the first two weeks of May in comparable stores, versus a 13% increase in the same time period last year.

Okay got it. And you mentioned the weather, just trying to be a little more insulated from the swings in the weather. Did you quantify the impact of the weather on the first quarter? I know it was pretty good in February and early March, but it was quite cool and wet in the latter part of the quarter.

Yes, I don't think – I'd tell you, I don't - I think to your point, Feb, March balanced out what we, you know, April, so I think weather, if you put everything together, was a little bit neutral and it was more the taxes and our merchandise mix that really drove the comp sales.

Okay. Great. Thank you, Jason.

Thanks, Patrick.

And Mr. Mazzola, there are no further questions at this time. I'll turn the call back to you. Please continue with your closing remarks.

Thank you all for your time today. We appreciate it. Thanks, and have a great day.

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