Citi Trends, Inc. (CTRN) Q3 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Citi Trends Third Quarter 2016 Conference Call. During the presentation, participants are in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded on Tuesday, November 22, 2016. I would now like to turn the conference over to Pat Watson. Please proceed.

Thank you, Tamma. 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’d now like to turn the call over to Bruce Smith, Chief Operating Officer & 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 & Chief Executive Officer. First, I will provide you with details related to the third quarter and year-to-date 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 third quarter increased 1% to $161 million, while comparable store sales declined 1%. The lower comp store sales reflected a decrease of almost 9% in the average unit sale, partially offset by an increase in the average number of items per transaction, of more than 6% and an increase in the number of customer transactions of 1.5%. Comparable store sales by month during the third quarter were up 2% in August and down 3% in both September and October. Almost all of the comp store sales decrease in October occurred in around 100 stores that were closed at some point due to Hurricane Matthew. By merchandise category, sales in the third quarter in comparable stores were as follows. Home was up 34% on top of a 14% increase in 2015 third quarter. Accessories including footwear were flat after being up 3% last year. Men's sales were down 1% this year and down 3% in last year's third quarter. The ladies division was down 2% this year and down 3% last year and children's sales were down 7% in this year's third quarter after being down 3% in the third quarter of 2015. For the first three quarters of the year, total sales were up 0.4% while comparable store sales were down 1.6%. Cost of goods sold as a percent of sales increased to 110 basis points in the third quarter due to a 50 basis point decrease in the core merchandise margin and increases of 30 basis points each in freight cost and inventory shrinkage. For the year-to-date cost of goods sold as a percent of sales has increased 80 basis points, with the core merchandise margin freight and shrinkage all contributing about equally to the higher rate of cost of sales. SG&A expenses rose 3.6% in the quarter, due primarily to a higher store count, normal expense inflation and the inclusion in last year's third quarter of a $900,000 pretax benefit from legal recovery, which had a positive impact on income per share of $0.04. As a percent of sales, SG&A expenses increased 90 basis points to 35.9% due primarily to the legal recovery that benefited last year's third quarter expenses and the deleveraging effect of a decrease in comparable store sales. Year-to-date SG&A expenses as a percent of sales are 90 basis points higher than in the first three quarters of 2015. Depreciation expense declined almost $400,000 during the quarter as a result of opening fewer stores than in the past. Net loss in the third quarter was $800,000 or $0.06 per share, compared with net income of $600,000 or $0.04 per share last year. Year-to-date the company has net income of $7.8 million or $0.53 per share, compared with $12.1 million or $0.79 per share earned in last year's first three quarters. Now I'll turn the call over to Jason.

Thank you, Bruce and good morning, everyone. While we were disappointed with the comp store sales decrease of 1%, we believe it reflects continued progress in moving toward positive quarterly comp store sales growth. We were optimistic about the quarter because of the strong start to back-to-school and improved buy now, wear now strategy, a lady's business that was firming up and improved value in the children's business, specifically in newborn infant and toddler. However, the progress we made in the merchandise mix was not enough to offset the higher-than-expected 9% decrease in AUS as well as -- as well as some of the external challenges we faced. On the positive side, our home sales were once again very strong. Our customer accounts were up in all three months of the quarter and our units per transactions were up significantly. We continue to manage our inventories well and we are in a great position to take advantage of many buy now, wear now deals in the marketplace to drive fourth quarter sales. During the quarter we faced two significant external challenges that had a negative impact on sales. First, Hurricane Matthew disrupted our business in the Southeast. The Hurricane lead to store closures that had an approximate $1 million negative impact on our business. This reduced comp store sales by0.6% for the quarter. Second, the unseasonably warm weather dampened demand for fall product. While we intentionally shipped this product later than last year and planned it down, it performed below our expectations until October. As the weather began to normalize in October and November, these businesses improved. The decrease in AUS of 9% was more than we anticipated. The three drivers of the decline in AUS were improved value, strong sales of home product and more buy now, wear now warm weather merchandise. As we move into the fourth quarter, the increased penetration of fall-oriented products should offset some of the pressure on AUS. In ladies, a negative 2% comp store sales decrease was not up to our expectations; however, it was still the best ladies result we have seen in four quarters and represents progress in the right direction. The team has done a better job identifying key fashion trends in delivering them on a timely basis at extremely compelling values. Ladies is off to a strong start in November and we're hopeful that the sales momentum will continue. While our children's area is still not where it needs to be, we're on the right path to improved margin turn and sales. We have reduced inventory in these areas to better align with sales. We have done a much better job balancing core and fashion looks and most importantly, we are offering exceptional value. We have seen a severe reduction in the AUS as traditional urban brand that maintain relevance over the past few years in newborn, infant and toddler are no longer meaningful to our customer. As our customers shift to more mainstream fashion in these areas, we should be able to take advantage of more market opportunities verse relying on make-ups. We were very excited about the home performance during the quarter. Home delivered a 34% comp store sales increase on top of a 14% increase last year. It was our 17th consecutive quarter of comp store sales increases in home. We expect another strong performance in the fourth quarter. For the year, we expect gross margin to be approximately 38.5%. This is 50 basis points below what we originally expected as sales have been below plan. As our sales trend improves, we should be able to drive our gross margin back to 39%. Now I will provide an update on sales to date for the fourth quarter. Sales for the first three weeks of November in comparable stores had increased over 6% versus a decrease of 8% last year in the same time period. The fall winter offering has improved nicely from the third quarter trend and home continues to outperform. We were pleased to see comp store sales momentum and we're optimistic that it will continue into the balance of the quarter. Our inventories are in very good shape heading into the fourth quarter. Total inventory was up 1% as we took a conservative stance on inventory and held more liquidity for opportunistic buys to drive holiday sales. For the balance of the year we see total inventories as flat to up 2%. We successfully opened seven new stores and relocated or expanded three stores in the third quarter. As of today we operate 533 stores in 31 states. During the fourth quarter, we plan to open two new stores and relocate or expand two. For the full year we plan to open 18 new stores, relocate or expand 13 and remodel 20. Thank you all for your time. Operator, we will now take any questions.

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

Thank you. Good morning, Jason. Good morning, Bruce.

Good morning, Patrick. Did you -- I apologize I had -- I jumped on the call a little bit late. I have three calls going on simultaneously. So multitasking in the extreme, but did you break down -- did you give the breakdown of the -- Bruce, of the months of the quarter? I know you started off August.

Yes, we were up 2% in August and down 3% in both September and October. And I mentioned that almost all of the decrease in October was in a 100 stores that were impacted by Hurricane Matthew.

Okay. Got it. And current -- the November comp is up 6%.

Up 6%, yes.

Versus down 8% last year. So last year what was the story this time a year ago that contributed to the down 8% in the very early part of the quarter.

There were a couple things. We actually in 2014 had a very strong November start. The weather was more favorable I think in 2015. November was one of the warmest Novembers on record and our customer truly is buy now, wear now customer and so we suffered pretty heavily when November was extremely warm last year. So as the trend -- as the weather improved a little bit, we flowed goods a little bit later and we saw a nice pick up. So we got some of those dollars back this year.

Okay. Got it. And then on the holiday, just wondering if you could give some high-level thoughts on just marketing, how you see your core customer right now economically thoughts on layaway and how that will unfold and maybe have some early indications there and the competitive environment as well.

Sure I can -- I'll start with a few of those questions. With regard to the core customer, we still think that the macro environment for our customer continues to be positive both African-American unemployment as well as low income unemployment are still low. Gas prices although creeping up a little bit are still relatively low as well as food prices. In addition some of the wage increases that have happened over the past two years would likely benefit our customer. So those trends have a feeling pretty good about our customer, the health of the customer as far as where they are today. Just to give you a little insight on our holiday plans, overall I think this year we had an improved gift-giving strategy really focused in that home area. So you saw those positive numbers from the home department. If you walk into our stores now, we have themed gift-giving tables set up throughout the store to offer a wide assortment of merchandise with really I think outstanding values. So great gift-giving items for the entire family. We believe it will create customer excitement and drive sales. Also gift-giving strategy adds breath to our store and protects us from some of the -- some of the weather impacts that weather can play if it's an extremely warm December again. So we like that. Maybe I turn it over to Bruce, on layaway, I don't think there's anything specific on layaway. But Bruce maybe you have a comment on that.

No, there is really no mismatch. We came into the quarter fairly close to last year's level. So nothing to point out there.

And Patrick just with regard to competition, we do think it's a super competitive environment out there and that probably led to our AUS being lower than we anticipated because the one thing that the merchandising team is really focused on is extremely compelling value. Our customer responds very well to compelling value and that's something that we've tried to really put forth in the store throughout all classifications, genders and size ranges.

Got it. Okay. And then as you think out toward the back half of the quarter, the month of January, anything that we should think about just from a -- just thinking about the tax refunds and I know that has been -- the timing has been a meaningful issue over the past several years. Is there anything that you're looking at right now one way or the other that would have some impact on the business in the back half of January?

I think this year will be relatively normal to last year meaning last year we really lost the benefit of all taxes in January of 2016. There weren't any and so we won't be up against that hurdle in January of 2017. So it will be really a normalized January versus a normalized January whereas last year, we had a difficult January because in the last two days of the month, Bruce help me out was that we lost 45%.

Yes 45%, just a couple million dollars.

Yeah in those last few days. So I think this year it will be more normalized. We don't know exactly what will happen in February. We've heard the taxes might be delayed until the 15. I think they were delayed till the 10th last year, but we'll see how that unfolds, but I don't think it will have an impact on January.

Okay. Thank you both very much.

Thank you, Patrick.

Thank you, sir for your question. [Operator Instructions] Gentlemen, our next question comes from the line of Mark Cooper from Pacific Ridge. Please proceed with your question.

Good morning. I was hoping you could reflect a little on the competitor's landscape and what's driving the AUS down and if there's since systemic changes that you might have identified in the marketplace.

I would tell you like I mentioned with Patrick, it is an extremely competitive environment out there with regard to apparel. I think what we're trying to do at Citi Trends is making sure we have on trend merchandise at extremely compelling value. I did mention that in kids in particular the traditional urban brands are not the trends that our customers gravitating towards anymore. So we struggled against the AUS in that area and just macro level, I'll tell you the three things that are going on with AUS and how we want to attack the competition is by offering tremendous value. That's first and foremost with regard to AUS. And in the third quarter, we did have more buy now, wear now product, which has a lower AUS than fall merchandise and then lastly pushing our home initiative, home tends to have or does have a lower AUS then the other divisions in the company. So that's a little bit of a drag on AUS, but we really believe that the combination of the two will result in exciting the customer. We're happy to see customer traffic up in all three months. So we feel although it's putting some pressure on sales right now, we're moving in the right direction.

Can you remind me, what buy now, wear now, what that means?

Sure. That means that for example in August and September when traditional retailers are converting their entire floor to say fall merchandise, it's still very hot out in the United States specifically in the Southeast. And so what we would -- what we do is we bring in fresh buy now, wear now merchandise, meaning sandals that almost markdown prices that we're able to buy opportunistically in the market. So we drove a lot of business in July, August and September, in shorts, in sandals, and short-sleeved tops and really push those businesses because there wasn't a lot of opportunity of push the fall-oriented businesses. So that's buy now, wear now, like buy now, wear now as it gets a little colder out we'll be focusing on you long bottoms, long sleeved tops, jackets and coats and boots and things like that.

Okay. Thank you.

Thank you, Mr. Cooper for your question. Mr. Mazzola, there appears to be no further questions at this time. I'll now turn the call back to you. Please continue the presentation or your closing remarks.

Great. Thank you, everyone for your time this morning and happy Thanksgiving.

Thank you, sir. Ladies and gentlemen, that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. Thank you once again. Have a wonderful day.