Citi Trends, Inc. (CTRN) Q4 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Citi Trends Fourth Quarter 2016 Earnings 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 today Friday, March 10, 2017. I would now like to turn the conference over to Tom Filandro, Managing Director at ICR. Please go ahead sir.

Thank you, Nelson. 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 this 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 and other subsequent filings 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. As you maybe aware yesterday the company issued a press release announcing the intent of a shareholder to nominate directors to the board. Today’s earnings will focus exclusively on our financial and operating results. Accordingly, during the question-and-answer session, we highly asked that you focus your questions on our business and corporate financials. Additional information will be forthcoming in the next several weeks as we make our required proxy filings with the SEC. I will now turn the call over to Bruce Smith, Chief Operating Officer and Chief Financial Officer. Bruce?

Thanks, Tom. 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 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 increased 5.4%, to $185.5 million, while comparable store sales increased 3.4%. The higher comp store sales reflected a 6% increase in the average number of items per transaction and a 5% increase in the number of customer transactions partially offset by decline in the average unit sale of 7%. By merchandise category, sales in the fourth quarter and comparable stores were as follows. Home was up 29%, on top of a 10% increase in 2015's fourth quarter. The Men's division increased 6% after decreasing 7% in last year's fourth quarter. Ladies' sales increased 3% following an 8% decline in the fourth quarter of 2015. Accessories including footwear increased 2% this year after being down 2% last year. And Children's sales were down 1% in this year's fourth quarter and down 8% in the fourth quarter of 2015. Total sales for the full year increased 1.7% while comparable store sales were down 0.4%. Cost of goods sold as a percentage of sales increased 30 basis points in the fourth quarter due to slightly higher freight costs and inventory shrinkage. For the full year cost of goods sold as a percent of sales increased 60 basis points, split almost equally between the core merchandise margin, freight and shrinkage. SG&A expenses as a percent of sales decreased 80 basis points in the fourth quarter due primarily to the leverage attainted from the increase in comp store sales together with favorable insurance results. For the full year, SG&A expenses as a percent of sales increased 40 basis points due primarily to a lack of expense leverage resulting from the 0.4% decrease in comp store sales. Depreciation expense declined $400,000 during the quarter as a result of opening fewer stores than in previous periods. As for income tax expense, the effective tax rate was lower in this year's fourth quarter and full year due to a greater benefit from work opportunity and other tax credits in 2016. Net income in the fourth quarter increased 60% to $5.6 million, or $0.38 per share, compared to $3.5 million, or $0.24 per share, last year. For the full year, net income was $13.3 million, or $0.91 per share, compared with $15.5 million, or $1.03 per share last year. In looking forward, fiscal 2017 will have 53 weeks with the extra week falling in the fourth quarter. From a sales standpoint, we would expect the extra week to generate approximately $11 million to $13 million while from an earnings perspective we would expect it to be close to breakeven. Now, I'll turn the call over to Jason.

Thank you, Bruce, and good morning everyone. We are very pleased with the results of the fourth quarter. Comp store sales increased 3.4% in the quarter and we delivered $5.6 million in net income, which is a 60% increase over last year. In addition, our customer count was up a strong 5% as our units per transaction which were up 6%. While the full year comp store sale decreased of 0.4% was below our expectation, there were a number of positives in 2016. Compared to last year, total sales were up 1.7%, units per transaction were up 5% and customer count was up 1%. We also delivered $0.91 per share in earnings. We ended the year with $114 million in cash and investments with no debt. We paid dividends of $0.24 per share. We successfully opened 18 new stores and most importantly we finished the year with a strong quarter of positive comp store sales. As we turn our attention to 2017, we believe we are well positioned to deliver positive comp store sales for the year. We are relentlessly focused on delivering outstanding product and value that excites our customer, fuels loyalty and drive spending. In the fourth quarter, we were happy with the progress made by the Ladies' and Children's departments. Ladies' delivered a 3% comp store sales increase for the quarter. The fashion content of our Ladies' business has improved nicely over the last six months. We have a balanced assortment of basics, fashion basics and fashion. In our fashion piece of the business, we are delivering more on-trend merchandise, each day that mix looks and feels more compelling. Although comparable stores in the Children's department were down 1%, we believe the Children's assortment has also improved. We have a better balance mix of core and fashion products and we offer exceptional values. We managed our Children's inventory well for the quarter ending the period down 7%, while delivering faster turns and improved productivity. The Home division was once again the standout division of the company during the quarter delivering a 29% comp store sales increase on top of a 10% increase last year. It was our 18th consecutive positive comp quarter in Home. Driving the business for the fourth quarter was our expanded toy offering as well as functional home, gift giving and beauty products. In 2017, we continue to view the Home division as a very strong growth vehicle. The Home area provides breathe to our merchant assortment and gives our customer a reason to shop at Citi Trends for more than just apparel needs. In addition to targeting our customers’ broader lifestyle needs, our Home assortment offers a hedge against weather driven demand providing more predictability to our business. Now, I’ll provide an update on sales to date for the first quarter. As we mentioned in our fourth quarter sales release on February 8, there was a delay in the timing of tax refund distributions as compared to 2016. Our customer is particularly sensitive to the timing of these refunds and that has been clearly reflected in our sales results. Sales to date through yesterday in comparable stores have decreased 7% in the first quarter. Despite the decrease in comp store sales, we are encouraged by the sales momentum we have experienced coinciding with the first meaningful tax refunds distributed by the IRS beginning on February 22. For the first 24 days of the quarter minimal tax refund distributions negatively impacted our performance resulting in the comp store sales decrease of 40%. However in the subsequent 16 days, we were able to recover a much of the sales short fall as we delivered a positive comp store sales increase of 47%. Each day since February 22nd has been a very strong double-digit positive comp store sales increased. Historically delayed tax refunds tend to have a negative impact on sales, but we are hopeful that with our improved merchandising strategies as well as a later Easter, we can make up the balance by the end of the quarter. We believe our inventories are in very good shape heading into the first quarter. Total company inventory was down 1.7% favorably below our store count increase of more than 2%. We owned less next-season-buy inventory coming into the first quarter and instead help those dollars open to take advantage of opportunistic deals and fresh trend right fashion across the company. We successfully opened six new stores since our last earnings call: Kansas City, Missouri; Panama City, Florida; Richmond, Virginia; Memphis, Tennessee; Philadelphia, Pennsylvania; and Hot Springs, Arkansas. As of today, we operate 537 stores in 31 states. We continue to target new store openings both within existing and new markets to capitalize on our unique off-price positioning. During 2017, we plan to open approximately 20 new stores, relocate or expand about 10 stores and remodel 20 current locations. Thank you all for your time. Operator, we will now take any questions.

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

Thank you. Good morning Jason and good morning Bruce.

Good morning, Patrick.

Jason on the – good morning. You ran through the first 24 days of the first quarter and I think you said comps down 40% and then you mentioned something about the next 16 days and recovering. What was that comp over the next 16 days?

Yes, that comp was 47%...

Positive.

Yes, yes, yes, 47% positive, of course, yes.

That’s right. Okay, okay. And then – but on the first quarter to date basis through yesterday down 7%, is that correct.

Correct, that is correct.

So thinking about the year overall and your earlier comment about positive same store sales for the year, how would you think about the cadence of same store sales through the year just given the fact that where comps are first quarter to date, the easier comparison in the first quarter and then the tougher comparisons – well the tough comparison or tougher comparison in the back half of the year? How should we think about the quarterly same store sales through the year or even broadly if you don't want to give you know specific ranges or numbers?

Sure. And as you know, we don't give specific guidance on a quarterly basis as far as comp store sales. However, our goal at Citi Trends is to drive consistent profitable comp store sales each and every quarter. That is certainly what Bruce and I and the entire Citi Trends’ team tried to do each quarter. And we believe we do have the right merchandise and strategies in place to deliver those positive comp store sales. Even within the first quarter, we are hopeful and we're encouraged by the signs that we're seeing that once the taxes came, our business really got back in gear and I do think the later Easter will help us. So we do anticipate delivering positive comp store sales results.

Even in the first quarter…

Again, we’re hopeful there.

Okay.

We're certainly looking for that.

Okay. And then a question on the department stores closures that are taking place and will take place in the first half of this year, thinking Macy's and Penny’s and maybe there might be some others as well. Just how do you think about that as it relates to the business? Do you see a potential negative impact as some of the department stores liquidate inventory at those stores that are closing? Or do you view it more as an opportunity perhaps to pick up some better merchandise buys and those kinds of things.

Yeah, I would do that more opportunistically that that it could be – that there will be more availability in the marketplace of great product first and foremost. And then second, as Bruce and I have experienced in our real estate team, we’ve also been able to get into some of the malls that some of the bigger companies are vacating and we've been able to sign some very attractive lease fields in those stores so far that the few that we've gone into have performed very well. So I think it's nothing, but opportunity for us.

Okay, okay. And then on the improvement in Ladies’, I think you said up 3% in the quarter, but it sounds like average selling price is still under a fair bit of pressure. So on that point I mean where do you see pricing in 2017? Do you think you'll see, continue to see more pressure on prices? Or will it be more kind of flattish? Or I mean is there potential even for some improvement there?

Yes. Yes, Patrick, very good question. I'll say for the first quarter we still see a little bit of pressure. We think the AUS will be down approximately 3% to 5%, but we've made some very nice improvements to where the 2016 trend was. For the full year, one of our key strategies for the year is to really get that AUS back to flat and to even see a positive – a slight positive on that. And across the company, what we’re doing is we're looking for opportunities to drive sales and higher AUS product that our customers really like; for example, denim, dressed, luggage, shoes, handbags; we're really looking for opportunities within higher AUS classes to drive the business. And so, I do see that that AUS flattening out in 2017.

Okay, thank you, Jason.

Thanks.

Thank you. [Operator Instructions] And we do have a question from the line of Pam Quintiliano with SunTrust. Please proceed.

Hi, this is David for Pam. How are you doing?

Hi, there. How are you, David?

Good. Could you talk about shrinking in the fourth quarter relative to historical levels and actions you plan to take going forward?

Yeah. Thanks, David, for your question. In the fourth quarter, shrink was up just a little over 10 basis points. This year, it was 1.3% versus 1.2% last year. We have a – as you can imagine we take shrinkage very seriously at Citi Trends and we have a loss prevention department that teams up with our store operations group to do monitoring in our stores on a regular basis and that’s been there for a number of years and will continue. So no significant changes to the way we handle shrinkage, but we are always treating it as a very serious item for us.

Okay. In terms of gross margin expansion opportunity in fiscal 2017, could you talk more about that and drivers behind that, you know, merchandising and planning and allocation and such?

Yeah, sure, I can give you some color there. We are updating our planning and allocation system in the second half of this year. The updated system will allow us to allocate merchandise to our stores with much better precision by ranking stores at the division and department level versus just the store level. The updated system should allow us to improve sales and inventory terms while reducing markdowns. And this should lead to improvements in gross margin that would predominantly be in the second half of the year. And as you may recall, we installed the new planning and allocation system in 2014 and 2015, which yielded very nice results. This would be an enhancement to that system. So we do see some opportunity at the back half of 2017 and then into 2018.

So could you see similar, I guess – well, how does that reflecting SG&A potential leverage in 2017 then?

I don't have specifics on that. I wouldn't want to say a specific number, Bruce would you have any color?

No.

Yeah, I don't think we want to publicly say any specific numbers to that, but we see opportunities there.

Okay. And historically speaking in past you had first 10 days of last quarter, last year a 35% impact on delayed tax refunds. And you were unable to make it up for the rest of the quarter. How is it different this year relative to the past? And I guess the later Easter, what impact has that on the quarter?

Sure, I'll start with Easter and then we will go back to taxes. So a later Easter generally has a positive effect on sales for a company like Citi Trends. When Easter falls in April, the stores have the opportunity to be well set up with exciting new spring merchandise and the weather is generally aligned with our customers by now where now philosophy meaning it's warm outside and spring fashion is out there. So we're looking forward to driving sales with a later Easter this year and we think there's an opportunity there. As it relates to taxes this year, there were more days without taxes. So a total of I think 24-days where last year it was only about I think 10-days. And so, we have had less time in the quarter to make it up where the last time when we were on the call we had a little bit more time to make up the sales deficit. And again, it is a significant deficit and that does affect our customers and traditionally it has been harder to make it up. However, we think our merchandise is more on point this year. And that later Easter will help us a little bit and that will be able to move it forward. So we are very hopeful about continuing to deliver some nice results and having a continuation of that sales momentum that we've seen in the last 16 days.

Okay. In terms of taxes on a different front, can you talk about what you think in potential changes to the tax rates including border taxes and how that would impact you?

Yeah, I probably – I think it’s too early to say anything specifically about the border tax or what the new administration might do because there's been so many conflicting reports. So we don't – we're not going to speculate about that and we don't really have much control over that. The team at Citi Trends is focused on exactly what we can control, which is what we buy and how we operate our stores, so that's where we're spending 100% of our time.

Okay, any updated thoughts on a potential loyalty program, as well?

Right now, we don't have any plans for a loyalty program. It is something that is on our radar screen. It's something that we review on a yearly basis, but in 2017 we don't have specific plans for a loyalty program.

Okay, great. Thanks. That's it for me.

Thank you. I appreciate it.

Thank you. I am showing no further questions at this time.

Okay, great. Thank you everybody for your time and have a nice weekend.

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